The S&P 500 Just Did Something It Has Only Done 30 Times Since 1950. History Says the Stock Market Will Do This Next | The Motley Fool (2024)

The S&P 500 (^GSPC -0.65%) is widely viewed as a benchmark for the broader U.S. stock market. The index was introduced in March 1957, but the methodology used to create it can be applied to earlier years to generate back-tested values that predate its conception. For that reason, its proprietor, S&P Global, lists the first value date for the index as Jan. 3, 1928.

Building on that, the S&P 500 just achieved one of its best monthly performances since 1950. The index skyrocketed 8.9% in November 2023, driven higher by encouraging economic data regarding inflation and the jobs market, both of which show signs of cooling. The upshot of those data points is that the Federal Reserve may be done raising interest rates and could be preparing to cut -- as Fed Chair Jerome Powell indicated Wednesday.

The S&P 500's 8.9% return in November is particularly impressive in context. A total of 886 months have elapsed since January 1950, and the S&P 500 has recorded a monthly increase exceeding 8% just 30 times.

There's good reason to think the market can continue to climb from here, too. Read on to learn more.

History says the S&P 500 could move higher over the next 12 months

The recorded three consecutive monthly declines in August, September, and October as investors fretted about stubborn inflation and soaring bond yields. But the index reversed course and rebounded 8.9% in November.

If you're worried that November's surge might just be a blip, history tells us that there's reason to be optimistic:

• Since 1950, the S&P 500 has moved higher 90% of the time during the 12-month period following a monthly increase exceeding 8%, according to Carson Group.
• Since 1950, the S&P 500 returned an average of 15.8% during the 12-month period following a monthly increase exceeding 8%, according to Carson Group.

In short, history says the S&P 500 could gain about 16% through November 2024. The key word there is could. Past performance is not a reliable predictor of future returns because every situation is unique, especially the current situation.

Now, it's not unusual to see such a big monthly gain after a sharp pullback. For instance, the Carson Group's data shows some of these monthly surges around the end of the bear markets in the mid-'70s; the early '80s; the early 2000s; the global financial crisis; and the brief one early in the Covid-19 pandemic. It makes sense that when a recovery takes hold, it can happen quickly.

The bear market we may be about to exit has had its own combination of challenges. Time has passed, but the U.S. economy is still emerging from the pandemic. Business closures, supply chain disruptions, and government stimulus programs pushed consumer prices higher at the fastest pace in decades, prompting an aggressive response from the Federal Reserve (as discussed in the next section). There is simply no historical precedent for that sequence of events, at least not recently. So investors should take comparisons between the past and present with a grain of salt.

That said, there is another reason to think the S&P 500 might move higher in the coming year.

The Federal Reserve may be done raising interest rates

The Federal Reserve is tasked with maintaining price stability and maximum employment. One way policymakers pursue that two-sided economic goal is by adjusting the target federal funds rate, a benchmark that influences other interest rates across the economy.

Here's how it works: Policymakers can increase the target federal funds rate to discourage spending through higher borrowing costs, which slows the economy. Or policymakers can reduce the target federal funds rate to encourage spending through lower borrowing costs, which stimulates the economy.

Lately, the Federal Reserve has raised rates at a nearly unprecedented pace to combat inflation. Policymakers moved so aggressively that many economists began sounding recession alarms last year, but a downturn has yet to materialize. In fact, the economy has remained remarkably resilient, so much so that investors see the situation as a double-edged sword.

Specifically, economic resilience is a good thing because it should drive revenue and earnings growth across the stock market. But economic resilience is also a bad thing because it gives the Federal Reserve license to keep raising interest rates, and that could cause a recession.

For that reason, investors were pleased when October data showed cooler inflation, slower wage growth, and fewer jobs created, all combined with an uptick in unemployment. The implication behind those trends is that policymakers are bumping up against one end of their two-sided economic goal (i.e., maintain maximum employment), which means the Federal Reserve may be done raising interest rates.

Indeed, the Federal Open Market Committee indicated Wednesday that no hikes were in the offing for 2024, and rates could begin coming down. The S&P 500 rose 1.37% to come within 2% of a new high.

The S&P 500 tends to rise sharply when rate hikes stop

CME Group's Fed Watch tool analyzes the probability of future rate hikes using pricing data from federal funds futures contracts. It currently signals (1) a 100% chance that the Federal Reserve is done raising rates, and (2) a 68% chance that policymakers will cut rates by at least 100 basis points in 2024.

Similar shifts in monetary policy have historically driven the stock market higher. Indeed, the Federal Reserve has engaged in six rate hike cycles since 1982, and the S&P 500 returned an average of 17.6% during the 12-month period following the end of those cycles, according to JPMorgan Chase.

Here's the bottom line: Similarities between the past and present imply meaningful upside in the S&P 500, but those similarities are superficial. Whether stocks move higher or lower over the next year ultimately depends on the economy and investor sentiment. However, the stock market has consistently created wealth for patient investors, and there is no reason to think that trend will change. For that reason, now is a good time to buy stocks no matter what happens during the next 12 months.