This Stock Market Indicator Has Been 100% Accurate Since 1964. It Signals a Big Move in the 2nd Half of 2024. | The Motley Fool (2024)

The S&P 500 (^GSPC 0.10%) is widely regarded as the best barometer for the overall U.S. stock market due to its scope and diversity. The index measures the performance of 500 large companies that cover 80% of U.S. equities by market capitalization.

The S&P 500 advanced 14% during the first half of 2024, outpacing the historical average of 5%, and one stock market indicator says the index is headed even higher in the coming months. Specifically, during presidential election years involving an incumbent (a president running for reelection), the S&P 500 has always -- 100% of the time -- generated a positive return in the second half of the year.

Here's what investors need to know.

History says the S&P 500 could climb 11% in the second half of 2024

There have been 16 presidential elections since the was created in 1957, half of which involved an incumbent president running for a second term. As mentioned, the index has always been a profitable investment during the second half of election years involving an incumbent, regardless of which presidential candidate won the election.

The chart below shows the S&P 500's return in the second half of every presidential election year. Reelection years (years in which an incumbent was running for reelection) are marked with an asterisk.

Data source: YCharts. The table shows the S&P 500's return in the second half of all presidential election years since the index was created in 1957. Asterisks denote reelection years, meaning an incumbent president was running for a second term.

As shown above, during presidential election years, the S&P 500 returned an average 4% during the second half. However, if the results are limited to years when an incumbent president was running for reelection, as Joe Biden is in 2024, the S&P 500 returned an average of 11% during the second half.

That may sound contrived, but Jeff Buchbinder at LPL Financial offered this logical explanation in a recent blog post. "We believe this pattern is partly due to the incumbent priming the pump ahead of the election with fiscal stimulus and pro-growth regulatory policies to stave off potential recession and encourage jobs growth." However, he also noted that Biden has limited opportunities to prime the pump given that Republicans control the House.

Regardless, history says the S&P 500 could return roughly 11% in the second half of 2024. The index has already advanced 2% in July, leaving implied upside of 9% through December.

That said, past results are never a guarantee of future returns. Macroeconomic fundamentals will ultimately determine how the stock market performs in the remaining months of 2024.

History says the S&P 500 could soar when the Federal Reserve cuts interest rates

Wall Street will monitor labor market and inflation data closely in the coming months, watching for proof the economy is headed for a soft landing, a scenario in which the Federal Reserve brings inflation back to its 2% target without tipping the economy into a recession.

In June 2022, inflation reached a four-decade high of 9.8% due to supply chain disruptions and stimulus programs related to Covid-19. The Federal Reserve responded with its most aggressive rate-hiking cycle since the early 1980s, and the federal funds rate now sits at a 23-year high. That is potentially problematic for the stock market because consumers and businesses spend less when borrowing costs are elevated, which suppresses corporate earnings growth.

On the bright side, inflation dropped to 3.3% in May 2024. But pricing pressures have not eased enough to warrant the long awaited loosening cycle (a period when the Federal Reserve is cutting interest rates). So, investors are hoping inflation continues trending toward its 2% target, while other data points -- such as job openings and unemployment -- show a gradually cooling, but still healthy economy.

In that scenario, the Federal Reserve may cut interest rates later this year, and the economy may also avoid a recession. Such a resolution has historically been good news for the stock market. During the seven loosening cycles since 1987, the S&P 500 returned an average 6% during the 12 months following the first rate cut. But the average return was 16% during that 12-month period if the economy avoided a recession.

Investors should focus on long-term gains, not short-term movements in the stock market

Investors can put money to work in the stock market today knowing history is on their side. Indeed, the S&P 500 will return 11% during the second half of 2024 if its performance aligns precisely with the historical average. Of course, no stock market indicator is infallible, so investors should be cognizant of the risks.

If the Federal Reserve keeps interest rates elevated throughout the remaining months year, or if the economy sinks into a recession, the S&P 500 could easily decline in the second half of 2024. For that reason, investors should stick to a buy-and-hold strategy that aims to capture long-term capital gains.