When investors wrapped up 2023, many did so with a satisfied grin. The timeless Dow Jones Industrial Average (DJINDICES: ^DJI) successfully left the 2022 bear market behind, surging to a fresh record high. Simultaneously, the broad-based S&P 500 (SNPINDEX: ^GSPC) and the growth-oriented Nasdaq Composite (NASDAQINDEX: ^IXIC) achieved gains of 24% and 43% for the year, respectively.
As a new year unfolds, fresh opportunities and potential concerns emerge for investors. Amid various forecasting tools and economic metrics, a recession indicator, unerring for 72 years, appears to convey a clear message about the future of the U.S. economy and stock market.
Examining the ISM Manufacturing New Orders Index, a subcomponent of the widely followed ISM Manufacturing Index, provides insights into industrial order activity. Notably, a reading below 50 implies contraction, and December 2023 marked the 16th consecutive month below this threshold. With a historical tie to U.S. recessions, the index falling below 43.5 suggests a recession in 2024, based on past patterns.
While the Dow, S&P 500, and Nasdaq aren’t intrinsically linked to the U.S. economy’s performance, corporate earnings tend to fluctuate with economic health. If the ISM Manufacturing New Orders Index accurately foretells a downturn, historical precedent suggests potential stock declines.
Despite looming indicators, maintaining perspective is crucial. For long-term investors, history indicates that economic downturns and market corrections, though challenging for short-term traders, often turn out to be opportunities. Over the 78 years post-World War II, the U.S. has weathered 12 recessions, with the majority resolving in under a year. The recurring pattern shows that, except for the 2022 bear market, every downturn in Dow Jones, S&P 500, and Nasdaq Composite history has been surpassed by subsequent bull market rallies.
Highlighting the significance of time, the average bull market substantially outlasts the typical bear market. Research from June 2023 reveals that, over the past 94 years, the average bear market lasted 286 days, while the average bull market endured for approximately 1,011 days.
In conclusion, regardless of what 2024 holds for investors, those with a patient outlook and a gaze toward the horizon stand to be handsomely rewarded.
