As the year-end nears, holiday plans may take priority over investing. With major indexes soaring, you might think it’s a bad time to buy stocks. The S&P 500, Nasdaq, and Dow Jones have increased 26%, 29%, and 18%, respectively, this year.
With limited corporate news, potential gains may seem small. But the forces behind this year’s growth remain strong. Excitement about artificial intelligence (AI) and hope for lower interest rates continue to support the market’s rise. These factors could drive further gains before the year ends.
Roaring Into a Bull Market
The stock market began this year in a bull market, with the S&P 500 hitting record highs. The Nasdaq and Dow Jones also posted strong 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 to a lower-rate environment. Market watchers expect a third cut this December, further supporting market growth. Lower rates encourage consumer spending and corporate borrowing, driving economic expansion.
As the market climbed, stock valuations rose too. The S&P 500’s Shiller CAPE ratio topped 35, a level reached only twice since 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 prompt investors to hesitate before buying stocks at year-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 biggest declines happened in challenging market years.
For example, in 2018, fears of a Chinese economic slowdown weighed on markets. In 2022, inflation and rising interest rates triggered stock market declines. Excluding those years, the trend shows 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 often seen gains, supporting the idea of buying now. But markets don’t always follow historical trends, and current valuations are high. This may discourage some investors from acting right away.
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 at reasonable prices 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 perspective, there’s no need to rush into buying. Take your time, assess your options, and aim for long-term growth.
