History’s clues for market performance in 2024

Dave S. Gilreath: ©Dave Gilreath

Despite the stock market swoon in the first week of April, the S&P 500 has notched 22 new highs this year. The essential question for many investors is: How long will this growth continue before the market goes south?

There’s no way to know because it’s impossible to precisely predict significant market ascents or descents. Although some movements can be logically anticipated, the market is necessarily random. If it weren’t, it wouldn’t be a level playing field.

Like sports handicappers, market analysts deal in likelihood. And one of the main gauges for likelihood is market history because patterns often repeat or, at least, rhyme.

Historical correlates

So, a much more practical and answerable question than when will the market come down would be:

How has the market performed in the past under generally similar conditions? What historical correlates can be applied thus far in 2024, a year when:

• The market has started the year strong. A good start in January is usually auspicious. Since 1952, in years when January has been a positive month for the S&P 500, the entire year has usually been pretty good. This year, the S&P 500 grew 1.6% in January, boding well for the rest of 2024.
• A presidential election will be held. Of the 18 election years since 1952, only three have been negative for the S&P 500. The likely reason for this consistency is that both Democrats and Republicans do their best to goose the economy so their candidates can take credit.
• An incumbent president is running. In the same 72-year period, every election year that an incumbent has run has been a positive year for the market. The candidate in the White House can pull the levers of power in election years to juice the economy, and this has helped the market.

While the fourth year of a presidential term is good for stocks, the third is even better, regardless of whether an incumbent is running. Perhaps that’s because politicians understand economics well enough to know they should get a head start on buttressing their case for voters, as it often takes a while for policy actions to show up in the economy. And actions taken in the third year of a term may have had an effect that same year.

• Interest rates are on a plateau following a series of rate increases by the Federal Reserve Board (the Fed) and preceding an expected series of rate cuts. During such plateaus, especially the first half of them, the market has historically done quite well. The last Fed rate increase was in July. No one knows when rate cuts will start (not even the Fed, as they rely on recent data prior to cutting), so we don’t know which half of the plateau we’re currently on.
• The always forward-looking market is expecting the benefits of lower interest rates, which enable companies to borrow money more cheaply. Mere anticipation of lower rates is a strong force currently driving the market, along with a brisk economy that’s giving the Fed no impetus to cut rates to juice it. (Rates are currently high because the Fed raised them significantly and rapidly to tamp down business activity to decrease high post-pandemic inflation.)

Though the Fed is waiting longer to raise rates than originally expected—months ago, the consensus view had the first cut coming in March—the market was still performing well as of the week before Easter. In the first week of April, projections that cuts would begin in June dipped below 50%.

Thus, the golden market plateau between rate increases and cuts is being protracted as the Fed makes good on its contingent plans, as Chairman Powell said, to keep rates “higher for longer,” barring the emergence of data dictating otherwise.

This scenario comes in a presidential election year with an incumbent running.

How long is the market likely to register good returns after the Fed starts cutting rates? Over the past 50 years, after the first Fed rate cut in a series, a new low for the S&P 500 was hit in periods as long as 450 trading days and as short as a few days.

The tyranny of averages

Notwithstanding market corrections (10% dips, to be expected in growing markets), the average such period has been 195 days. This might be a disappointingly brief period for investors expecting to reap gains from stocks of companies enjoying a lower cost of money — but these investors should beware the tyranny of averages. The reality of statistical averages is that they usually don’t represent anything that actually happened, just an arithmetic synthesis of things that did.

The same is true of the average decline of the S&P 500 following the commencement of rate cuts. That figure is a seemingly scary 23.5%.

But in the data, this average is skewed deeper, and the 195-day average period for a new low is skewed briefer, by the statistical impacts of recessions, the force majeure of market conditions. In this century, market declines of more than 20%, coincident with the onset of recessions, occurred in 1974, 2001, 2007 (the financial crisis) and 2020 (the pandemic).

The Fed cuts rates when it identifies or anticipates economic conditions that are negative for business; lower rates are needed for business to function better in tough times. Understanding this, the stock market sells off in response to news of a recession, bringing deep declines.

Between late 2022 and early 2024, many financial advisors and economists predicted an imminent recession. When it didn’t come, they kept on predicting it, despite the persistent strength of the economy.

Never Mind

Recently, many of these same individuals have been pulling a Roseanne Roseannadanna, saying a big “never mind” now that the Fed seems to have engineered a soft landing for the economy — tamping down high inflation using steep, rapid interest rate increases, without the usual consequence of a recession.

Now, the consensus view has flip-flopped, with few seeing a recession as likely this year. If this is accurate — and it appears that it is — rate cuts beginning this summer would probably be followed by continued strong market performance through the end of the year and likely into 2025.

Some say that politics may influence the timing of Fed rate cuts. But considering the absence of any supporting evidence, this may be an overly cynical view.

While the Fed may not be political, it definitely doesn’t want to appear that way, so it might do the first rate cut in June, well before the Republican and Democratic presidential nominating conventions in July and August, respectively, or just wait until after the election. This schedule would probably help the Fed avoid charges of partisanship.

If the first cut is a big one — say, .75% — it may be time to take your stock gains and head for the hills. When the Fed cuts initially in one fell swoop, it’s usually because they see a recession coming. Otherwise, they’d be cutting rates more gradually, by smaller amounts — usually .25% apiece. Barring emergent circumstances, little by little is the Fed’s preferred pace so it can assess incremental impacts between cuts.

Huge caveat

There’s a huge caveat to all this: This time around, something different may happen than what history suggests. Many historically based projections have been rendered inaccurate by the unique Black Swan event of 2020 — the pandemic and its persistent economic after-effects. As Fed Chairman Jerome Powell said at a recent press conference, “the pandemic is still writing the story of our economy.”

Of course, all this information may be too much for anyone who casually asks you how long the market is likely to grow. A much more succinct answer would be: If you knew that for certain, you’d be living on your own tropical island.

Dave Sheaff Gilreath, CFP®, is a founding principal and CIO of Sheaff Brock Investment Advisors, an investment firm for individual investors, and Innovative Portfolios®, an institutional money management firm. Based in Indianapolis, the firms manage assets of about $1.4 billion. The investments mentioned in this article may be held by those firms, Innovative Portfolios’ ETFs, affiliates or related persons. There may be a conflict of interest in that the parties may have a vested interest in these investments and the statements made about them.