As the year-end approaches, holiday plans may overshadow thoughts of investing. With major indexes already surging, you might think it’s a bad time to buy stocks. The S&P 500, Nasdaq, and Dow Jones have risen 26%, 29%, and 18%, respectively, this year.
With limited corporate news, potential gains may seem small. Yet, the drivers behind this year’s growth remain strong. Excitement around artificial intelligence (AI) and hope for a lower-interest-rate environment continue to support market growth. These factors could fuel further gains in the weeks ahead.
Roaring Into a Bull Market
The stock market entered a bull market early this year, with the S&P 500 hitting record highs. The Nasdaq and Dow Jones also posted solid growth. Investors bet on new market drivers, especially AI, which boosted shares of key players like Nvidia and Broadcom.
Optimism grew with positive economic news, especially regarding interest rates. The Federal Reserve’s two rate cuts this fall signaled a shift toward a lower-rate environment. Market watchers expect a third cut this December, further encouraging market growth. Lower rates support consumer spending and corporate borrowing, fostering overall economic growth.
As the market climbed, stock valuations rose too. The S&P 500’s Shiller CAPE ratio topped 35, a level rarely reached since the index’s creation in the 1950s. The Shiller CAPE ratio, which adjusts for inflation and considers 10 years of earnings, highlights the market’s current high valuation. This may make investors hesitant to buy stocks before year’s end.
The S&P 500’s Year-End Performance
Looking at the past decade, the S&P 500 has gained in December six out of ten times. Declines occurred in 2022, 2018, 2015, and 2014, with drops of 5.9%, 9.1%, 1.7%, and 0.4%, respectively. Notably, the steepest declines happened in already challenging years for the market.
For instance, in 2018, concerns over China’s economy weighed on markets. In 2022, inflation and rising interest rates triggered stock market declines. Excluding those years, the trend favors gains in December. Investors in index funds or well-chosen stock mixes often benefited from buying stocks in early December.
Should You Buy Now?
With history as a guide, should you buy stocks before the new year? Recent Decembers have leaned positive, suggesting potential upside. But the market doesn’t always follow historical patterns, and current stock valuations are high. This might discourage some investors from acting now.
Still, any time can be the right time to buy stocks. Two key reasons support this view. First, even in an expensive market, quality stocks with reasonable prices still exist. Second, long-term investors benefit from ignoring short-term market shifts. Temporary gains or losses have little impact on multi-year returns.
So, if you spot good opportunities, now could be a great time to invest. But thanks to a long-term investment perspective, there’s no need to rush into buying. Take your time, assess your options, and aim for long-term growth.