As we enter December, it's common to hear directional stock market predictions for the new year. For example, an analyst might say the S&P 500 will be at 4,200 by the end of 2024, or the Dow Jones will crash to 32,000. While there can be some merit to these projections, and it's interesting to examine the assumptions that go into them, I prefer to make my investments based on a belief that's right quite often: The stock market will go up next year.
So how do I know it's going to happen? Well, I don't, but history is on my side.
The stock market is up far more often than it's down
First, let's look at some historical context for the S&P 500. 2023 has been an incredibly positive year with the market up around 20% including dividends. Some may consider this a red flag as they fear the market is more likely to decline following a strong year, but that's not the case.
If you look at the many positive years the S&P 500 has had, they're often followed by ... more positive years. In fact, the S&P 500 has only declined in 26 years since 1926 (on a total return basis). In other words, you have a 73% chance of being correct when you say the market will go up next year, at least from a historical perspective.
A nearly three-in-four chance of winning is better than any odds you'll find at the casino, yet you can easily invest in the market using a basic index fund like the Vanguard S&P 500 (VOO 1.00%) or SPDR S&P 500 (SPY 0.95%) to enjoy those odds yourself.
But what about what happens following a year of particularly strong returns like we've had in 2023? Well, the S&P 500 has delivered a total return of at least 20% 36 times since 1926, and the average total return following those years was 10.5%.
Another consideration is that 2024 is also a presidential election year. Every election year is different, and this one may be one for the books, but does that mean you should avoid the market? Well, for presidential election years specifically, the S&P 500's total return averages 11.6%.
Put simply, sitting out the market in 2024 isn't a good idea.
Continuous investing is key
Investors can always come up with reasons to stay out of the market: elections, COVID-19, geopolitical crises, terrorist attacks, inflation, or any other news that takes your eye off the ultimate goal. While you shouldn't ignore these events entirely, the reality is the market has consistently risen over the long term despite the scary headlines capturing our attention.
So while I can't say for certain if the market will go up or down in 2024, history is on my side when I say it should go up. Remember that as you continuously invest in an index fund, and you can build substantial wealth over the long term.
