As the year 2024 concludes, the S&P 500 is prepared to perform an action it has achieved only on six prior occasions. Here's my strategy.
The S&P 500 (1.26% increase in ^GSPC) has served as a common performance standard for numerous investors due to its composition of the 500 largest publicly traded U.S. companies. This diversity across various industries offers insight into the market's overall health.
Although the index was established in 1957, it can be traced back to 1927 by examining its inception. Analyzing these annual returns reveals intriguing patterns, like the one we're presently observing. So, what can we infer about the market's conduct in 2025 based on historical data?
The market mirrors the late '90s dot-com boom
The market has shown exceptional strength in the past two years, yielding over 20% returns (assuming 2024's 27% returns persist until year's end). Such extraordinary performance is infrequent, having occurred only six times since 1927.
We're now entering the third year of this exceptional run. What occurs after the market delivers 20% or more returns for two years consecutively? The response: A mix of outcomes.
- 1929 return: -8.4%
- 1937 return: -39%
- 1956 return: 2.6%
- 1997 return: 31%
- 1998 return: 26.7%
- 1999 return: 19.5%
If 2025 follows in the footsteps of 1937, investors might endure some hardships. On the other hand, it could turn out to be like the late '90s, offering investors nearly five consecutive years of 20% or more returns.
What took place in the late '90s? A tech boom fueled by the internet. While the boom ended poorly a few years later, the market witnessed significant investment success during the surge.
The internet emerged as a significant technological achievement, despite the majority of the involved companies not delivering impressive long-term returns for investors (however, during the rise, they provided substantial gains).
This scenario seems remarkably similar to the present, with AI stocks becoming the investment craze. Many people predict that the current AI revolution will have as profound an impact on work and society as the internet did. Consequently, it's natural to speculate that the market will behave similarly to the late '90s.
What's in store for me in 2025?
As we approach 2025, I'm planning to adopt a tactical buying approach. If I come across a desirable company trading at a reasonable price, I will invest. Otherwise, I'm content to invest in a broad market index, such as the S&P 500.
This strategy allows me to minimize losses if AI stocks decline, unlike being fully invested in the AI sector. The S&P 500, however, is heavily influenced by some AI companies due to its market-capitalization-weighted structure. Therefore, it may not be completely protected from a market correction. Nevertheless, healthcare, financial, and consumer goods firms will help cushion the blow.
It's essential to remember that 2025 doesn't hold any unique significance. Although it marks a new year, the market is a continuous entity, so transitioning from 2024 to 2025 isn't a significant milestone for judging market trends.
With this in mind, the S&P 500 remains an attractive investment option due to its balanced portfolio. However, if you're seeking higher returns, specific companies within that index show promising investment potential, and I'll be leading the charge in 2025.
In light of the market's current performance, some investors might consider diversifying their portfolios by investing in specific companies that show promising potential. This strategy could yield higher returns, as seen during the late '90s tech boom. (containing: investing, money)
Furthermore, when allocating funds, it's crucial to consider the long-term impact of investments. Historically, the market has experienced various outcomes following consecutive years of significant returns, such as the one we're currently witnessing. (containing: finance, market)
