As the year draws to a close, you might find yourself more preoccupied with holiday festivities and gift shopping than with financial investments. It’s easy to think that it may not be the best time to purchase stocks, especially since the major stock indexes have already experienced significant rises.
Currently, corporate news is on the lighter side, which might suggest that the potential for stock market gains could be limited. To illustrate, the S&P 500, Nasdaq, and the Dow Jones Industrial Average are on track to end the year up by 26%, 29%, and 18%, respectively.
However, the factors that have propelled this growth are still in play, from the excitement surrounding the surge in artificial intelligence (AI) to the optimism fueled by the onset of a lower-interest-rate era. These elements could continue to influence market performance in the upcoming weeks and beyond.
Given these considerations, the question arises: Is it wise to invest in stocks before the year ends? Let’s explore this further and see what historical data might suggest.
Surge into a Bull Market
First, let’s review the stock market’s performance over the current year. The S&P 500 entered the year in a bull market, achieving several new record highs. The other major indexes also saw significant gains, with investors placing their bets on new growth catalysts, particularly the advancements in AI. Notable companies in the tech sector, like chipmaker Nvidia and networking giant Broadcom, have seen their stock values dramatically increase in recent years.
Additionally, the economic landscape has been shaped by positive developments, notably the Federal Reserve’s interest rate cuts. This fall, the Fed implemented two rate reductions and is anticipated to make a third cut before year-end, possibly during their December 18 meeting, as suggested by the CME FedWatch tool.
The rise in the S&P 500 has also led to higher stock valuations. The S&P 500 Shiller CAPE ratio, a respected measure of stock valuation that adjusts for inflation and looks at a 10-year earnings history, has climbed above 35 — a level only reached a couple of times since the index was established in the late 1950s.
Given these high valuation levels, some investors might hesitate to dive into the stock market right before the new year.
Decade Review of the S&P 500
Looking at the historical performance, over the past ten years, the S&P 500 has typically seen gains in December, although it recorded declines in the years 2022, 2018, 2015, and 2014. Notably, the more significant drops occurred during years already marked by broader market challenges, such as economic slowdown concerns and inflation spikes.
Excluding these tumultuous years, the general trend suggests that investing in December, particularly through an S&P 500 index fund or a well-chosen selection of stocks, has been beneficial.
To Buy or Not to Buy?
Returning to our initial question: Should you buy stocks before the year’s end? Historical patterns show that December has often been a positive month for stocks, which could be seen as an argument for investing now. However, while history can provide guidance, the market remains unpredictable and can still offer surprises, especially when it looks expensive as it does currently.
Nonetheless, don’t let this mixed advice deter you. Buying stocks could be opportune at any time for a couple of reasons. First, even in a market perceived as costly, there are still quality stocks available at reasonable prices. Second, with a long-term investment perspective, short-term market fluctuations become less significant, impacting your returns minimally over many years.
Therefore, if you spot compelling investment opportunities now, it could be a great time to buy stocks. But remember, with a focus on long-term investing, there’s no need to rush your decision.
*Adria Cimino does not own any shares in the companies mentioned. The Motley Fool owns and recommends Nvidia and suggests Broadcom. Full disclosure policies are available from The Motley Fool.*
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.
