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What does the new year have in store for investors?
If I knew the answer to that question with any degree of certainty, I’d be on the path to extreme wealth by year-end! (And please beware of anyone who does claim to know what will happen this year.)
Despite the uncertainty, however, I can say that there are multiple factors that indicate 2024 could be a very good year for smart investors.
First of all, 2024 follows a year when the S&P 500 performed extremely well (up 24%). Since 1928, the year following a year with 20% gains or better saw a gain of about 6% on average.
This year is also the fourth year of the so-called “presidential cycle.” Historically, this has been the second-best year of the four-year cycle. From 1928 to 2021, the market rose more than 6% on average during this year. And whether you believe in patterns like this or not, this one has held up remarkably well over the decades.
For the current cycle (President Joe Biden’s term), here are the numbers for the S&P 500 Index…
- Year 1: Up 27%
- Year 2: Down 19%
- Year 3: Up 24%
- Year 4: ?
According to the Stock Trader’s Almanac, the last two years (pre-election year and election year) of the 48 presidential terms since 1833 have produced a total net market gain of 772%, far higher than the 337% gain of the first two years of those terms.
The reason that pattern may hold for the rest of this cycle is that many factors conducive to a bull market are aligning right now, such as…
- The economy: It’s been growing at a healthy rate for five consecutive quarters and posted a 5.2% annualized growth rate in the third quarter, far above the historical average of about 3.2%. And the Atlanta Fed estimates that GDP rose at a 2.3% pace in the fourth quarter (we’ll get the first official read on Q4 GDP from the Commerce Department on January 25).
- The labor market: It’s gone from red-hot to moderately healthy, with another 199,000 jobs added in November. December payroll numbers come out this Friday, and the expectation is for another 163,000 jobs to be added to the economy. More people working mean more paychecks and more consumers spending. Plus, the percentage of people working continues to tick back up to the pre-pandemic level.
- Inflation: It’s been falling for all categories – including goods, services and housing. That should keep the Federal Reserve on the sidelines this year and could even prompt it to cut rates later in the year.
- Corporate profits: Corporate profit margins have remained healthy – always a good sign for stock prices going forward. And analysts expect S&P 500 earnings to rise almost 12% in 2024, well above the 8.4% average of the last decade. Part of that is due to the fact that the debt service burden for large companies remains very light because these firms locked in rates when they were low.
Finally, there are a couple of important long-term factors that could extend the bull market beyond 2024…
- Productivity: U.S. worker productivity is growing again. Hourly output per worker rose at a 4.7% annual pace in the three months ending in September, according to the Labor Department. And productivity is the most important determinant of the long-term health and prosperity of an economy. It also makes companies more profitable and sends their share prices higher.
- Innovation: There are multiple super-innovations emerging that will offer investors significant upside over the remainder of this decade and into the next.
There are a couple of caveats, however. The excess savings Americans have enjoyed since the pandemic are now falling, which could put a dent in consumer spending later this year. And credit card delinquencies are on the rise, due to higher interest rates. These two factors bear watching.
But all in all, most signs point to economic growth and an ongoing bull market this year.
Can I promise that? Of course not. But I would bet on it (by investing in the stock market).
You should too.
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