The S&P 500’s 25% gain in 2024, coupled with its +26% increase in 2023, has raised questions about the market’s momentum. Historically, such back-to-back gains are rare, occurring only four times since 1928. The question now is what happens next.
The past few instances of consecutive 25%+ returns were followed by varying outcomes: a sharp decline in 1937, a modest increase in 1956, and a slight gain in 1999. While it’s impossible to predict the future with certainty, one trend is clear: diversification works. The fixed income side of the ledger, including the Bloomberg Aggregate Bond Index, saw a relatively modest gain of 1%, while the stock market has picked up the slack.
This dynamic is a reminder that diversification is meant to balance out market fluctuations. As the bond market often underperforms during strong equity years, it’s essential to acknowledge its role in maintaining portfolio stability. The good news is that such back-to-back gains are more than made up for by the inevitable downturns that follow.
In 2024, the stock market benefited from a healthy economy, with an average inflation rate of 3%, unemployment rate of 4%, and real GDP growth of roughly 3% annualized in the second and third quarters. While it’s essential to appreciate the good times while they last, history suggests that they will eventually give way to more challenging periods.
Investors can learn valuable lessons from recent market performance, including the importance of higher yields in mitigating price returns. As Michael and I discussed on our latest Animal Spirits episode, understanding the factors behind a successful year like 2024 is crucial for navigating the complexities of the stock market.
Source: https://awealthofcommonsense.com/2025/01/2024-it-was-another-good-year-in-the-stock-market