7th Time in 75 Years: S&P 500 Makes History – Is a Stock Market Boom Ahead?

Summary

The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have experienced significant volatility in recent months due to factors such as President Donald Trump’s tariff and trade policy. Historically, outsize gains in May for the S&P 500 have correlated with big green arrows over the next year for investors. This phenomenon has been observed seven times since 1950, with the S&P 500 having been higher 100% of the time one year after an advance of at least 5% in the index during May. The average annual return following a gain of at least 5% in May is 19.9%, more than double the average annual return of 9.2% for the S&P 500 since 1950.

Volatility and Uncertainty on Wall Street

The current market landscape is characterized by volatility-inducing variables, including President Donald Trump’s tariff and trade policy. The president has introduced a 10% global tariff, as well as higher "reciprocal tariff" rates targeted at dozens of countries with adverse trade imbalances with the U.S. Since this initial introduction, the president has placed a 90-day pause on reciprocal tariffs for all countries save China, then announced a reduction on most reciprocal tariffs with China in mid-May.

The only thing investors currently know about tariffs is that we have no clue what comes next. Between the federal appeal and the Trump administration changing its tune consistently on which goods or countries are subject to tariffs, investor sentiment can shift at a moment’s notice. The historical priciness of equities is another concern, with the S&P 500’s Shiller price-to-earnings (P/E) ratio reaching nearly 39 in December, its third-highest reading during a continuous bull market since January 1871.

The Importance of Historical Correlations

When volatility picks up on Wall Street, it’s common for investors to look to the past for correlative events that might help forecast directional moves in the future. Even though no correlative event can predict what’s to come with guaranteed accuracy, some events have near-perfect or perfect track records of forecasting future directional moves in the Dow Jones, S&P 500, and/or Nasdaq Composite.

One of these rare events occurred in May for the benchmark S&P 500 — and historical precedent suggests it might be all systems go for stocks over the next year. The month of May is often known for spring showers, but the only thing raining on Wall Street was money for optimistic investors. The broad-based S&P 500 shrugged off tariff-related concerns and closed out the month with a gain of 6.2%. This marked only the seventh time the S&P 500 had gained at least 5% in the month of May.

Historical Precedent

What’s of interest is what’s happened following these outsize single-month gains for Wall Street’s top health barometer. As you might expect, S&P 500 returns for the one- and three-month periods following a 5% or greater gain in May were relatively mixed over the prior six occurrences. The average one- and three-month returns were more or less on par with the historical one-month and three-month returns of the S&P 500 since 1950.

However, as Carson Group’s Chief Market Strategist Ryan Detrick points out, there’s a sizable difference in average returns when looking out over the next 12 months. The S&P 500 has been higher 100% of the time one year after an advance of at least 5% in the index during May. What’s more, the average annual return of 19.9% following a gain of at least 5% in May more than doubles the average annual return of 9.2% for the S&P 500, dating back to 1950.

Bull and Bear Markets

Just as important, Detrick’s data set points to the disparity between optimism and pessimism on Wall Street. Stock market corrections and bear markets are normal, healthy, and inevitable aspects of the investing cycle. But as data from Bespoke Investment Group has shown, these downturns tend to be short-lived. The average S&P 500 bear market between the start of the Great Depression (September 1929) and June 2023 has lasted just 286 calendar days, or about 9.5 months.

On the other hand, Bespoke Investment Group’s calculations show that the typical S&P 500 bull market endured for 1,011 calendar days spanning 94 years. On average, bull markets last 3.5 times longer than the typical bear market. Being optimistic and relying on time as an ally has been a successful formula for investors spanning more than a century.

Conclusion

The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have experienced significant volatility in recent months due to factors such as President Donald Trump’s tariff and trade policy. Historically, outsize gains in May for the S&P 500 have correlated with big green arrows over the next year for investors. The average annual return following a gain of at least 5% in May is 19.9%, more than double the average annual return of 9.2% for the S&P 500 since 1950.

While it’s impossible to predict what’s to come with certainty, historical precedent suggests that the stock market has been given a green light to soar over the next year. As always, it’s essential for investors to remain informed and adapt their strategies to changing market conditions.