The long pause between record highs is bullish

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The S&P 500 closed at a record high on Monday, its second straight record close after Friday saw the index break a two-year streak without a record high.

And stock market history suggests this break between records portends a better-than-average year ahead for the S&P 500.

In a note to clients on Monday, Keith Lerner, co-chief investment officer at Truist, noted that in 13 of the 14 prior instances the index went at least a year between record highs the S&P 500 was higher 12 months later. The average gain over the ensuing 12 months? 14%, about 3 percentage points above the average annual return for the S&P 500.

Moreover, in nine of those 14 instances the S&P 500 rose at least 10% over the next year. The widespread bullishness that overtook Wall Street strategists during 2023’s rally, then, appears to be on solid footing, historically speaking.

The only instance in which stocks were lower a year later was 2007. That record close took seven years after the tech bubble burst and it was of course followed by the 2008 financial crisis that sent the S&P 500 off nearly 60% peak to trough.

This outlier, for Lerner, underscores the need for the Fed to “stick the soft economic landing” and bring down inflation and interest rates without a recession. Which, he adds, the market is pricing in.

Lerner also noted that, “[like] any historical study, this should not be used in a vacuum. However, it does suggest that making fresh highs after a prolonged period tends to be a positive sign.”

And while everyone in the investment world knows past performance is no guarantee of future returns, the calendar has its patterns.

Stocks go long(ish) periods without making new highs for reasons that essentially boil down to a recession or something close to it.

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