The S&P 500 (^GSPC -0.01%) is having a spectacular year. So far, it's up 22.8% including dividends, marking a significant turnaround from 2022, when it plunged into bear market territory.
In fact, the S&P 500 has only posted an annual loss 15 times since its inception in 1957. In nine of these cases, the index immediately rebounded the following year with a gain, similar to 2023.
I dug through the data to find out what typically happens next in situations like this, and you'll probably be very happy with what I found.
History isn't the only reason why 2024 could be a great year for the S&P 500
The peak of the pandemic seems like a lifetime ago, but the flood of stimulus money from the U.S. government combined with record-low interest rates led to the spike in inflation that sent the stock market crashing in 2022.
In June last year, the Consumer Price Index (CPI) reached 9.1% annualized, its highest level in 40 years, prompting the Federal Reserve to raise interest rates at the fastest rate in its history. In just 18 months, the key interest rate rose from 0.25% to 5.50%, luring investors out of stocks and into risk-free assets such as cash and government bonds.
Investors rightly expected the pace of interest rate hikes to slow in 2023, which is why the S&P 500 rallied. Attention has even turned to interest rate cuts lately, with experts predicting that the Fed could cut interest rates five times in 2024. That alone could be what will drive a strong rally in the stock market next year.
But let's go back to the historical data I mentioned above. Recovery years like 2023 have always been followed by another positive year, which is an extremely good sign for 2024.
Additionally, the average gain based on nine cases from 1957 is 15.1%. That suggests 2024 won't be quite as strong as 2023, but historical data doesn't take into account the potential rate cuts that could lead to a higher return.
Image source: Getty Images.
What stocks should investors buy to prepare for 2024?
First, it is important to remember that past performance is no guarantee of future results. Historical data alone is not enough to solidify the next move in the stock market, otherwise we would all be very rich.
However, certain stocks will clearly benefit from a fall in interest rates next year. Huge real estate agent Redfin is one of them, especially when the real estate market takes off.
Additionally, artificial intelligence (AI) stocks have had a spectacular year and are expected to bring a lot of momentum into 2024. AI can significantly increase the productivity of companies and has the potential to transform the economy in the long term.
Nvidia will likely continue to perform well as the company struggles to keep up with demand for its AI data center chips. Similar, Microsoft Earlier this year, we bet $10 billion on ChatGPT developer OpenAI, one of the AI industry's leading startups.
Palo Alto Networks is also seeing a surge in demand for its cybersecurity software, which is increasingly powered by AI.
For risk-averse investors, buying shares in Warren Buffett's holding company is a good idea Berkshire Hathawayis typically a safe bet, having doubled the return of the S&P 500 every year (on average) since 1965.
Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Microsoft, Nvidia, Palo Alto Networks and Redfin. The Motley Fool recommends the following options: Short February 2024 $8 Calls on Redfin. The Motley Fool has a disclosure policy.