February 21, 2024

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A long stop between record highs is considered bullish

A long stop between record highs is considered bullish

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The S&P 500 closed at a record high on Monday, its second straight record close after Friday saw the index break a two-year streak below a record high.

Stock market history suggests that this spread between the records portends a better-than-average year for the S&P 500.

In a note to clients Monday, Keith Lerner, Truist's co-chief investment officer, noted that in 13 of the previous 14 cases, the index had moved at least a year between record levels, and the S&P 500 was higher after 12 months. Average gains over the next 12 months? 14%, about 3 percentage points higher than the average annual return of the S&P 500.

Moreover, in nine of those 14 cases, the S&P 500 rose at least 10% over the following year. The broad bullish trend that has gripped Wall Street strategists during the 2023 rally appears to be on solid footing, historically speaking.

The only instance where stocks fell after a year was 2007. This record close took seven years after the tech bubble burst, followed of course by the 2008 financial crisis that sent the S&P 500 down nearly 60%.

This exception, for Lerner, underscores the Fed's need to “stick to a soft landing” and lower inflation and interest rates without stagnation. The market is pricing it in, he adds.

Lerner also noted that “[like] Any historical study should not be used in a vacuum. However, it does indicate that reaching new highs after a long period tends to be a positive sign.”

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While everyone in the investment world knows that past performance is no guarantee of future returns, the calendar has its own patterns.

Stocks go for long periods of time without making new highs for reasons that essentially boil down to a recession or something close to it.

Day after day, the market can seem like a random walk. Over time, stocks – and the company shares they represent – track the overall performance of the economy.

On the other hand, the S&P 500 has now been flat over the past two years.

Looked at another way, the brutal bear market of 2022 showed us just how afraid investors are of inflation and its effects on economic growth; Last year's rally reveals how long it took investors to overcome this fear.

After long breaks between record closes, stocks tend to perform better than average over the next 12 months.  (Source: Trust IAG, FactSet)

After long breaks between record closes, stocks tend to perform better than average over the next 12 months. (Source: Trust IAG, FactSet)

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