Humans have looked to patterns to try to discern what the future holds for thousands of years. Studying the positions of planets and stars and reading tea leaves are a couple of notable examples.
Don't think this is a practice limited to eons ago, though. Some investors still think that historical patterns and trends can be used to predict how stocks will perform going forward. Two such examples point to a booming stock market in 2024 with another potentially signaling a crash. Here's which ones are useful -- and useless -- to investors.
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The good, the good, and the ugly
Perhaps the most discussed stock market pattern in 2024 is what is often called the presidential cycle. This view holds that stocks are likely to perform well during U.S. presidential election years.
History lends some support to the presidential cycle effect. There were 24 U.S. presidential elections between 1928 and 2020. The S&P 500, which is a pretty good proxy for the overall stock market, delivered positive returns in 20 of those years.
There's also another historical pattern that is encouraging for investors. The S&P 500 has existed in its current form with 500 companies represented since 1957. Every time that the index fell by at least 15% in one year and rebounded by 15% or more in the subsequent year, it continued the momentum with a solid gain in the third year. The S&P plunged 19% lower in 2022 but jumped 24% in 2023. If history repeats itself, we're due for another solid performance in 2024.
While those two patterns look pretty good, another is downright ugly. It relates to the U.S. M2 money supply, which includes all of the cash people have on hand, in checking accounts, savings accounts, certificates of deposits (CDs), and money market accounts. Going back to 1870, M2 has declined by 2% or more four times before now. In each case, a major economic decline followed. And when the economy goes south, the stock market usually does too. This is relevant now because M2 money supply is sinking for the first time since 1933.
US M2 Money Supply data by YCharts
Two out of three ain't bad
As the late rocker Meat Loaf once sang, "Two out of three ain't bad." I think there could be a double meaning with the sentiment in this case. In my view, the two historical patterns that point to a rising S&P 500 in 2024 are useful while the M2 money supply trend is essentially useless.
The underlying premise behind the presidential election cycle theory is that stocks rise in election years because the sitting president tries to bolster the economy. At a minimum, the person in the White House will avoid taking actions that would hurt the economy.
This makes sense politically and practically. It seems to be a reasonable explanation, at least in part, for why the S&P 500 tends to perform well in U.S. presidential election years.
What about the pattern where the S&P falls, rebounds, then moves even higher? I suspect there's a solid reason behind this one as well. Multiple studies have found that there's a momentum effect with stocks where past winners keep on winning. Also, the average bull market lasts nearly three years. If the S&P 500 begins a new bull market in the year following a major sell-off or soon thereafter (as we've recently seen happen), the index historically will continue to rise.
On the other hand, I don't think the recent M2 money supply decline is anything to worry about. Physical cash simply isn't as important as it once was because of the increased use of credit cards and digital payments.
Goldman Sachs economist Manuel Abecasis noted in a report in August 2023 that "the relationship between money supply and economic outcomes broke down a long time ago." He's not alone in that view. George Washington University economics professor Pao-Lin Tien told Marketplace last year that the "connection between money stock [supply] and economic activity has been declining over time."
No guarantees
As interesting as it might be to delve into which historical patterns and trends could give hints about how stocks will perform, they don't matter very much. I think it's more likely that the stock market will rise in 2024 than not. However, there are no guarantees. History doesn't always repeat itself.
Investors who focus on the long term don't have to be concerned about what the stock market will do in 2024. They can rely on the best trend of all -- stocks go up more than they go down given enough time.
