After recording a 202% increase over the past 12 months. Bitcoin (Cryptocurrency: BTC) It hit an all-time high of $73,098 on March 14. However, over the next seven weeks, the cryptocurrency plummeted by more than 20%, hitting bottom at $58,298 on May 2, 2024.
This sharp decline suggests investors are losing their appetite for risk, perhaps due to concerns about how rising inflation and rising interest rates could affect the economy. But whatever the reason for this decline, there’s a pattern investors should be aware of: Every time Bitcoin has fallen at least 20% from its peak in the past decade, S&P 500 (SNPINDEX: ^GSPC) We will experience a correction or bear market within the next 12 months.
If Bitcoin crashes, stock prices are likely to follow suit.
Bitcoin hit all-time highs in 2014, 2017, and 2021 before dropping at least 20% after each event. The S&P 500 then fell into stock market correction and even bear market territory, often within a few weeks, but never for more than 12 months.
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2014: Bitcoin reached an all-time high of $646 on July 1, 2014, before falling more than 20% over the next six weeks. The S&P 500 entered correction territory on May 21, 2015, with the index ultimately dropping 12.4%.
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2017: Bitcoin peaked at $19,345 on December 17, 2017, before falling over 20% in a week. The S&P 500 entered correction territory on January 26, 2018, eventually dropping 10%. The S&P 500 entered correction territory for the second time on September 20, 2018, eventually dropping 19.8%.
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2021: Bitcoin reached a high of $67,617 on November 9, 2021, before plummeting 20% ​​over the next three weeks. The S&P 500 entered a bear market on January 3, 2022, eventually dropping 25%.
No stock market indicator is perfect. Bitcoin never fell 20% before the market corrections that began in November 2015 or July 2023, nor did it fall 20% from its highs before the bear market that began in February 2020.
However, there is a simple explanation for why these signals were not seen: Bitcoin also did not peak within 12 months of these events.
Some Wall Street analysts predict a stock market correction in 2024.
Many stocks are currently trading at expensive valuations relative to historical levels. The S&P 500 index currently trades at about 21 times forward earnings, higher than its five-year average of 19.2 and higher than its 10-year average of 17.8, according to FactSet Research. Expensive valuations lend credence to the idea that the market is undergoing a correction, with some Wall Street analysts predicting one as soon as 2024. JPMorgan Chase It has set a year-end target of 4,200, which is 23% lower than the current figure of 5,460. Morgan Stanley The firm set its year-end target for the S&P 500 at 4,500, 18% below current levels.
Interestingly, Wilson then offers a slightly more optimistic, slightly longer-term outlook: He expects the S&P 500 to trade at 5,400 by May 2025. While this prediction doesn’t invalidate his end-of-year forecast, it does mean he thinks the broad market index will trade essentially sideways over the next 12 months.
Don’t try to time the market, but be prepared to buy more when a correction comes.
Personally, I never sell stocks in anticipation of a market correction or bear market for two reasons. First, stock market indicators are not perfect. Second, even though the stock market has crashed this year, trying to time the market is a strategy that usually backfires.
Consider the insights of Amanda Lott, head of wealth planning strategy at JPMorgan Chase.
“Over the past 20 years, 7 of the 10 best stock market days occurred within just 15 days of 1 of the 10 worst market days. If an investor missed those 10 good days by trying to avoid the down days before and after, their average annual return would be 5.7%. But what if that same investor stayed invested throughout the entire period, accepting the good and bad days? Their annual return would be 9.9%, nearly double that of an investor who timed the market.”
That means investors who pull out of stocks in an attempt to time the market are likely to miss the most crucial recovery days, and missing even a few days could hurt a portfolio’s long-term performance. That said, I plan to keep some extra cash in my portfolio this year to prepare to take advantage of any market downturns.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Bitcoin and JPMorgan Chase. The Motley Fool has a disclosure policy.
This stock market indicator is sounding more alarming than we last saw in 2021, suggesting a big move is on the way in 2024. This was originally published by The Motley Fool.
