The S&P 500, a significant benchmark of the U.S. stock market, experienced a challenging period last year due to surging inflation, causing concerns among investors. In response, the Federal Reserve implemented a rapid increase in the federal funds rate, leading to higher interest rates across various sectors of the economy. This bold monetary policy move intensified worries about an impending recession, ultimately resulting in the S&P 500’s worst performance since the 2008 Great Recession in 2022. However, there has been a notable shift in investor sentiment this year.
The first half of 2023 witnessed a remarkable turnaround for the S&P 500, with a substantial 15.9% rise attributed to factors such as moderating inflation, stronger-than-anticipated earnings reports, and robust economic growth. Encouragingly, one indicator suggests that this positive momentum will persist in the coming months.
The data reveals that in years when the S&P 500 achieved a first-half return of at least 10%, it continued to rise over the next 12 months in a significant majority of cases since 1950. Specifically, out of 22 instances, the S&P 500 continued its upward trajectory in 17 years following such strong first-half performances, as reported by Carson Investment Research. This translates to a 77% correlation between initial gains and subsequent ones.
The table below presents a breakdown of these historical trends, with the left column indicating the year, the middle column showing the first-half return for the S&P 500, and the right column displaying the return over the subsequent 12 months.
|Year||S&P 500 YTD Returns Through June||S&P 500 Returns Over the Next 12 Months|
Source: Carson Investment Research. YTD = year to date.
Aside from the correlation mentioned earlier, there’s another intriguing insight from this data: when the S&P 500 achieves a 10% or greater first-half return, it records an average gain of 12.2% over the subsequent 12 months. Given that the S&P 500 posted a 15.9% gain in the first half of 2023, closing at 4,450 points by the end of June, if history is any guide, it could potentially climb by 12.2% from that point to reach 4,993 by June 2024. This implies a 13.4% increase from its current level of 4,402.
This projection is particularly optimistic because the S&P 500 is currently just 8 percentage points away from a record high, meaning it’s inching closer to bull market territory. Historical data from Hartford Funds indicates that during the last nine bull markets, the S&P 500 posted an average return of 186%.
However, it’s essential to note that while historical data can provide valuable insights, investing decisions should not solely rely on momentum or past trends. Every market situation is unique, and various economic indicators, such as the Federal Reserve’s interest rate policies and money supply trends, must be considered.
Nonetheless, history does underline the benefits of patience in investing. Longer holding periods have consistently increased the probability of positive returns in the S&P 500, as illustrated in the table below, based on data from January 1928 through December 2022.
|S&P 500 Holding Period||Positive Return Probability|
Source: Capital Group, Crestmont Research.
This historical data shows that the S&P 500 has consistently delivered positive returns over every rolling 20-year period since 1928. Therefore, investors who opt for an S&P 500 index fund can reasonably expect to grow their wealth over the next two decades, even accounting for occasional economic downturns.
In fact, over the last 20 years, the S&P 500 provided a remarkable return of 531%, equating to an annualized growth rate of 9.6%, despite facing two recessions during that period. To put it into perspective, investing $150 weekly in an S&P 500 index fund could potentially yield $446,700 over the next two decades.
These reliable and consistent returns are why renowned investor Warren Buffett has often recommended an S&P index fund as the ideal choice for most individuals looking to invest their money wisely.