Considering an Investment in Stocks Before the New Year? Let's Delve into Historical Trends.
Considering an Investment in Stocks Before the New Year? Let's Delve into Historical Trends.
As we approach the final trading days of the year, you might be more preoccupied with holiday plans and gift lists instead of investing. It's understandable that you might think now isn't a good time to purchase stocks, given that the three major indexes have already seen significant gains.
With a slower pace of corporate news at present, isn't the potential for further gains limited? The S&P 500 (-0.43%), Nasdaq, and Dow Jones Industrial Average are on track for increases of 26%, 29%, and 18% respectively, for the year.
However, the factors driving this strong performance remain, from excitement about the artificial intelligence (AI) revolution to optimism about the emergence of a lower-interest-rate environment. These elements could continue to drive performance in the coming weeks and beyond.
Given all this, should you invest in stocks before the new year? Let's delve deeper and see what history has to say.
Charging into a bull market
Let's first discuss the stock market's performance this year. The S&P 500 kicked off the new year by confirmed its presence in a bull market and went on to set multiple record highs, as mentioned. The Dow Jones and Nasdaq also climbed, and investors began to bet on new growth drivers for the market. AI advancements gained traction, and companies at the forefront of the industry, such as chip designer Nvidia and networking leader Broadcom, saw their shares soar in recent years.
Moreover, investors focused on positive economic news, believing that potential interest-rate cuts would boost consumer spending and ease borrowing, investing, and company growth. This fall, the Federal Reserve carried out two rounds of rate cuts, introducing a new lower-interest-rate environment. And the market expects a third rate cut before the year ends, according to the CME FedWatch tool.
2023
Furthermore, the S&P 500's growth has led to increases in stock valuations. The S&P 500 Shiller CAPE ratio has surpassed 35 - a level achieved only twice before since the S&P 500 launched as a 500-stock index in the late 1950s.
4.4%
The Shiller CAPE ratio is considered an effective measure of valuation since it's inflation-adjusted and considers earnings per share and stock prices over a 10-year period. This shows that the stock market, in general, appears expensive today, compared to historical levels.
Investors might think, given this, it's best not to rush into stocks before the new year.
2021
The S&P 500 over the past 10 years
4.3%
Let's turn to history. Over the past 10 years, the S&P 500 has risen in December six times:
| Year | December percentage gain || --- | --- || 2024 | 4.4% || 2022 | 4.3% || 2021 | 3.7% || 2020 | 2.8% || 2018 | 1% || 2017 | 1.8% |
2020
However, the S&P 500 decreased in December in 2023, 2019, 2016, and 2015 by a respective 5.9%, 9.1%, 1.7%, and 0.4%. It's worth noting that the deeper dips occurred in years that were already challenging for markets.
3.7%
For example, in 2018, the S&P 500 dipped due to general economic concerns, including fear of a slowdown in China's economy. And runaway inflation, along with interest-rate increases, brought down the stock market in 2022.
If we remove the difficult years and focus on the overall trend, investors betting on the index or selecting the proper mixture of stocks benefited from purchasing stocks in early December.
2019
Should you invest now?
2.8%
Now, let's address our query: Considering all this, should you actually invest in stocks before the end of the year?
History suggests that December was more often a positive month than a negative one for stocks in recent times, supporting the notion of investing now. However, it's important to remember that the market doesn't always adhere to historical trends and may surprise us. And the market does look expensive at present.
2017
However, don't allow this mix of pros and cons for investing now to deter you. The good news is that any time could be the best time to purchase stocks, and there are two main reasons for this.
1%
First, even in an expensive market, you can find high-quality stocks that still trade at reasonable prices. And second, if you concentrate on investing for the long term, short-term market fluctuations won't have a significant impact on your returns over an extended period.
1.8%
As a result, now is a great time to invest in stocks if you find intriguing opportunities. Nevertheless, thanks to your long-term investment focus, you don't have to feel rushed.
2016
Despite the potential limitations in corporate news and the S&P 500's Shiller CAPE ratio surpassing historical levels, the factors driving the market's strong performance, such as AI advancements and lower interest rates, could continue to drive stocks' gains in the coming weeks. (follows from the text discussing the current market situation and potential factors for further gains)
Given the historical trend of the S&P 500 rising in December more often than not, investing in stocks before the new year might align with this pattern and potentially benefit from short-term gains. (follows from the text discussing the historical performance of the S&P 500 in December)
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