After a war-driven sell-off sent the S&P 500 (^GSPC +0.14%) cratering nearly 10% in March, the index has come roaring back in April. The rally has been driven by the usual suspects: Semiconductor and other artificial intelligence stocks more prevalent in the Nasdaq Composite (^IXIC +0.30%), some of which were hardest hit in the first quarter. Investors buying the dip have been rewarded.
But stock volatility remains high with ongoing negotiations and threats between the United States and Iran. With the S&P 500 recently trading at an all-time high, investors may be wondering if it's smart to simply wait for another downturn in stocks before buying again. Fortunately, the strong market rally in the first half of April provides a clear signal for what comes next.
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Stocks climbed more than 12% in 13 days
In the 13 trading days leading up to April 17, the S&P 500 rallied 12.3%. That's just the 10th time since 1950 that the index has climbed that much that fast. Not even the recovery from "Liberation Day" last year saw stocks climb that quickly. The last time the S&P 500 exhibited such a strong rally was in the recovery from the COVID-19 crash in 2020.
Investors may remember the checkmark-shaped recovery from that 2020 crash, which ultimately signaled the start of another very strong bull market. Importantly, that kind of quick recovery in stocks is indicative of strong buying activity that can support continued increases in stock prices. In 8 out of the 9 13-day rallies exceeding 12% in the S&P 500, the index ended even higher 12 months later, according to data collected by Carson Investment Research's Ryan Detrick.
The median 12-month increase in the index in those cases is 22.6%, well above the S&P 500's historic average return.
That said, the market doesn't always rally straight away. Two-thirds of the time, the S&P 500 was lower than the high reached in the 13-day streak after three months. That may suggest the odds are good that markets will pull back from their current highs. However, the median drawdown over three months is less than 1 percentage point. So, stock prices might not get much better than they are right now.
It's worth mentioning an important factor about the previous data points. Most of those 13-day rallies happened amid bear markets. The biggest outlier, in March of 2000, came when the index traded near its all-time high. Stocks crashed 24.5% over the next 12 months that year. The current rally started before the index had even entered a correction. So, it's possible stocks won't continue moving higher at the same pace as they did after other rampant rallies in the index.
Still, history suggests the odds are good that stocks will continue to move higher from here.
Timing the market
Trying to time the market based on recent performance is a bad idea. Even if you fear another pullback in stocks, waiting for it can often result in missing out on further upside. As such, it's best to look for undervalued stocks in today's market, of which there are plenty.
In fact, some of the stocks leading the resurgence in the S&P 500 still look undervalued, according to top analysts. After dismal underperformance from AI stocks, software stocks, and other growth stocks in the first quarter, the three-week rally still hasn't pushed their valuations to unreasonable levels. As such, they present great buying opportunities and another reason why the rally could continue from here.
That said, you don't have to pick individual stocks to participate in the long-term performance of the stock market. A simple index fund can bolster anyone's portfolio. After all, history suggests the index as a whole is headed higher. There's no need to pick losers and winners when you can buy the whole lot with minimal fees.
Either way you choose to invest, you shouldn't wait for stocks to pull back from their current price before buying. Right now is as good a time as any to add to your portfolio, and history backs up that statement.
