A rare occurrence for the S&P 500
The S&P 500, consisting of 500 U.S. companies, was established in its current form in 1957. Throughout its 66-year existence, the index has experienced positive annual gains approximately 70% of the time. While down years are not uncommon, positive years are more prevalent. However, what is considerably rare is for the S&P 500 to undergo a significant decline followed by a substantial surge in the subsequent year.
From 1957 to 2022, the S&P 500 encountered drops of 15% or more on five occasions. However, it rebounded with gains of 15% or more in the following year only three times. In 2022, the S&P 500 suffered a 19% plunge, but it is set to conclude 2023 with an increase of over 20%.
Even if we consider earlier iterations of the S&P 500, instances of steep declines followed by significant recoveries are infrequent. Since the 1920s, there have only been five occasions when the S&P 500 and its predecessors experienced a decline of 15% or more, followed by a rise of 15% or more in the subsequent year.
Has the S&P 500 displayed a pattern of fluctuation—falling, rising, and then falling again—as it has in the past?
In 2008, the S&P 500 plummeted over 38% due to the financial crisis. However, it rebounded by more than 23% the following year. This positive trajectory continued, though at a slower pace, in 2010 with a nearly 13% increase.
The index experienced a 23% decline in 2002 as a result of the dot-com bubble bursting, but it made a strong comeback in 2003 with a 26% surge. In 2004, the S&P 500 posted another rise, though smaller, with a gain of almost 9%.
In 1974, the S&P 500 plummeted nearly 30%.
If history serves as a guide, we may witness a similar pattern in 2024. The S&P 500 has the potential to maintain its positive momentum in the coming year but may deliver a performance less remarkable than that of 2023.
Unfortunately, there is no guarantee that history will repeat itself. From a statistical perspective, previous trends hold little significance due to the limited sample size.
While some Wall Street analysts anticipate a rise in the S&P 500 next year, it is expected to be at a more moderate rate. For instance, Bank of America analysts have set a target price of 5,000 for the index, representing an increase of nearly 6% from its current level. Similarly, Goldman Sachs projects the S&P 500 to reach 5,100 in the following year, equating to a gain of almost 8%. Nevertheless, the future of the stock market remains uncertain.
Over the long run, the S&P 500 has consistently exhibited an upward trajectory. As Warren Buffett once expressed, “In aggregate, American business has done wonderfully over time and will continue to do so (though, most assuredly, in unpredictable fits and starts).” Regardless of what transpires in 2024, the long-term outlook for the stock market remains promising.