the Nasdaq Composite (^ xix 1.70%) It is an index of about 3,500 stocks, many of which come from the technology and consumer discretionary sectors. To that end, the Nasdaq is often considered a benchmark for growth stocks because many of its components are at the forefront of various technologies and consumer trends, such as artificial intelligence, cloud computing, cybersecurity, and e-commerce.
Investors turned away from growth stocks as post-pandemic inflation hurt the economy. The Nasdaq fell deep into bear market territory in 2022, falling as much as 36% from its high.
This withdrawal was largely driven by recession fears caused by aggressive monetary policy. Specifically, the Fed combated inflation by raising its benchmark interest rate at its fastest pace since the 1980s. Many economists feared (and some still fear) that policymakers would trigger a recession by tightening credit conditions too quickly.
However, the Nasdaq shook off those concerns and rose last year as signs of economic resilience and excitement about artificial intelligence improved market sentiment. The index rose 43.4% in 2023, one of its best performances in history. Before that, the Nasdaq index had achieved annual gains exceeding 40% only five times since its inception in 1971.
Historically, annual gains exceeding 40% herald more upward momentum in the Nasdaq. Of course, investors should not give too much importance to such forecasts simply because each situation is unique. The past few years have been marked by the fallout from a global pandemic, and there is no precedent for such an event. However, historical patterns are still worth considering. Here’s what investors should know.
History says the Nasdaq may rise in 2024
The Nasdaq Composite returned 43.4% in 2023, the sixth time the index has risen more than 40% in a calendar year. The chart below shows the last five events and details the NASDAQ’s 12-month return.
|
year |
Nasdaq return |
Nasdaq returns (after 12 months) |
|---|---|---|
|
1991 |
56.9% |
15.5% |
|
1999 |
85.6% |
(32.3%) |
|
2003 |
50% |
8.6% |
|
2009 |
43.9% |
16.9% |
|
2020 |
43.6% |
21.4% |
|
Mediator |
15.5% |
Data source: YCharts.
As shown above, the Nasdaq returned an average of 15.5% over 12-month periods after posting annual gains of more than 40%. To add context, the Nasdaq is down about half a percentage point this year, so the implied upside is about 16% over the remainder of 2024.
Investors should view this number as more than just a guess. The combination of a global pandemic, the wildest inflation rates in four decades, and aggressive interest rate hikes make the current situation unique. As such, the Nasdaq may not perform as historical data indicates. But there is another pattern that investors may find interesting.
It is possible that the Federal Reserve will raise interest rates
The Fed has hinted that its interest rate hike may be over. In fact, the latest forecasts from policymakers imply three 25 basis point rate cuts in 2024. Futures investors are even more optimistic. the cm groupThe Fed’s monitoring tool — which uses pricing data from futures contracts to estimate the likelihood of future interest rate hikes and cuts — currently shows a 70% chance of at least six 25 basis point cuts in 2024.
If credit conditions do ease next year, this shift in monetary policy would boost borrowing and spending among businesses and consumers. In turn, this should lead to strong economic expansion and strong growth in corporate revenues and profits. Investors get excited about these expectations, so the Nasdaq has historically risen sharply after interest rate hike cycles end.
To illustrate, the Fed has guided the economy through six interest rate hike cycles since 1983. The Nasdaq has returned an average of 20% over the 12-month period after the last rate hike in those cycles. For context, the Fed last raised its benchmark interest rate on July 27, and since that time the Nasdaq has risen 6%. This leaves an implied upside of approximately 14% until July 2024.
Of course, this assumes that the Fed has already finished raising interest rates. But this result is not guaranteed. In fact, inflation accelerated back to 3.4% in December, from 3.1% in November, so policymakers may eventually decide to tighten credit conditions further.
Patience is the key to making money in the stock market
Investors should avoid strategies based on market timing. Not even the smartest economists and strategists on Wall Street know what next year holds. Some experts are predicting the worst collapse in decades, while others see only a modest risk of recession. But these concerns become less pressing with a long-term mindset.
The Nasdaq fell 56% during the bear market that accompanied the Great Recession, and it took more than three years for the index to regain its record high. But the Nasdaq is still up 424% since the draw began. In other words, investors who bought the Nasdaq Composite Index Fund on the day the bear market began saw annual returns of 10.8% over the past 16 years.
The lesson here is simple: patience is the key to making money in the stock market. Investors who purchase individual stocks should carefully research each company before purchasing shares, paying close attention to growth prospects and valuation.
Companies that are ready to leverage AI are a good place to start. This includes software vendors such as Microsoft (NASDAQ:MSFT) And Datadog (Nasdaq: DDOG)such as cloud service providers Amazon (Nasdaq: AMZN) And the alphabet (Nasdaq: Google) (NASDAQ:GOG)and chip makers such as Nvidia (Nasdaq: NVDA) And Broadcom (NASDAQ:AFGO). These companies are members of the Nasdaq Composite Index, and all but Datadog rank among its top 10 constituents.
Alternatively, investors can save themselves some work with an index fund strategy, either instead of or in addition to individual stocks. NASDAQ Composite Index Fund such as Fidelity Nasdaq Composite Fund (Nasdaq: ONEQ) You will benefit directly from Nasdaq returns. Investors should also consider an S&P 500 index fund such as Vanguard S&P 500 ETF (NYSEMKT:VOO). Warren Buffett often recommended this strategy. But regardless of the strategy, patience is the key to making money.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Susan Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Genuine has positions in Amazon, Nvidia, and the Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, Microsoft, Nvidia, and the Vanguard S&P 500 ETF. The Motley Fool recommends Broadcom and CME Group. The Motley Fool has a disclosure policy.