The stock market is set for another fantastic year in 2024. The broader benchmark S&P500 is above 6,000 and is up more than 27% this year (as of December 16). Fast-growing technology stocks, particularly in the field of artificial intelligence (AI), have fueled the bull market and show no signs of stopping as market strategists continue to raise their 2025 S&P 500 price targets.
The end of the rising interest rate environment has also helped the bulls, as lower interest rates typically lead to stock buying, and the economy still appears to be strong. Things are so good that the market is about to do something in 2024 that has only happened in four periods in the last hundred years – and history couldn’t be less clear about what will happen next.
The S&P 500 won’t just have a great year in 2024; it’s an excellent year in 2023, when the index rose more than 24%. Together, this means that the stock market has risen more than 58% over the past two years. Remember, the market has historically generated annual gains of about 10%.
Something could disrupt this epic run in the final days of the year. After all, the past few years have been anything but smooth sailing. But if the S&P 500 rises more than 20% this year, it will be only the seventh time in four periods in the past 100 years that this has happened, according to the researchers. Barrons:
Now I understand that the string of four years of gains of 20% or more between 1995 and 1998 are technically three separate examples of back-to-back events, but since they all happened in a row, I (and Barrons) it only counts as one period.
What happens in the third year, after two years of 20%+ gains, is somewhat mixed, but mostly leaning toward the negative.
After 1927 to 1928, the predecessor to the S&P 500 (the S&P 500 took its current form in 1957) fell 12% in 1929, signaling the start of the Great Depression and a difficult time for stocks. The market would fall by 90% over the next three years Dow Jones Industrial Average would not regain the value it had before the Great Depression until 1954.
During the years of the Great Depression, the market recovered more than 20% in 1935 and 1936, but fell by almost 40% the following year. The 1930s were a volatile decade for investors and the American economy.
After the period of 1954 and 1955, the market managed to post a small gain of 3% after several years of bull market following the Great Depression and the end of World War II. It would be another four decades before the stock market would experience another consecutive 20% increase and this time the S&P 500 stayed hot.
In 1995, the S&P 500 finished strong, up 34% from the previous year. In 1996, the company did it again, with a 20% gain. In 1997 the market shot up another 31%, before posting a 26% gain in 1998. In 1999, the market almost repeated itself for the fifth year in a row, when the price rose by 19.5%. The S&P 500 finally crashed in 2000, at the start of the Dot-Com bubble, and had three consecutive negative years between 2000 and 2002.
Most Wall Street analysts expect the S&P 500 to post another double-digit percentage gain in 2025 (but are more divided on whether it will be a gain of more than 20%). Frankly, market conditions look good. Inflation has cooled and the labor market remains strong. Goldman Sachs expects U.S. gross domestic product to grow 2.5% next year. In addition, newly elected President Donald Trump is expected to implement pro-growth policies such as corporate tax cuts.
What can go wrong? Lots of things:
Geopolitical tensions could continue to escalate and push up oil prices, which could hurt the market.
Trump’s potential tariffs could disrupt the economy and spark a trade war.
Trump’s tariffs and pro-growth policies are fueling inflation again, pushing up government bond yields.
It turns out that the Federal Reserve cut rates too early. As inflation gets higher, the Fed will stop cutting interest rates and may even raise them.
The economy suddenly tips into recession.
Bond vigilantes are demanding higher Treasury yields amid growing concerns about the U.S. budget, which could have a sobering effect on the market.
Many things can still go wrong that will prevent the market from rising next year or even go into the red. Investors should be aware of this and plan for it, even when market conditions and the economy look rosy. However, the market could also sustain this increase of more than 20% for a number of years, as was experienced in the late 1990s.
History has shown that it can be difficult to predict what will happen after two consecutive years of greater than 20% gains. The only thing that is somewhat predictable is that the S&P 500 will indeed rise in the long term.
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Bram Berkowitz has no positions in the stocks mentioned. The Motley Fool holds and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
The stock market has only experienced four such periods in 100 years – and history couldn’t be less clear about what will happen next. originally published by The Motley Fool