After a 202% gain over the previous 12 months, Bitcoin (CRYPTO: BTC) hit a record high of $73,098 on March 14. But during the seven weeks that followed, the cryptocurrency plunged by more than 20%, bottoming out at $58,298 on May 2, 2024.
That sharp decline suggests that investors are losing their appetite for risk, perhaps due to concerns about how sticky inflation and elevated interest rates will impact the economy. But whatever the reasons were behind this drop, there’s a pattern that investors will want to be aware of: Any time during the past decade that Bitcoin has plunged by at least 20% from its peak, the S&P 500 (SNPINDEX: ^GSPC) has experienced a correction or bear market within the next 12 months.
Where Bitcoin plunges, stocks are likely to follow
Bitcoin hit record highs in 2014, 2017, and 2021, and declined by at least 20% following each of those events. Thereafter, the S&P 500 slipped into stock market correction territory or even bear market territory, often within a few weeks, but never more than 12 months later.
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2014: Bitcoin reached an all-time high of $646 on July 1, 2014, then declined more than 20% during the next six weeks. The S&P 500 entered correction territory on May 21, 2015, and the index ultimately declined by 12.4%.
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2017: Bitcoin peaked at $19,345 on Dec. 17, 2017, then declined by more than 20% during the next week. The S&P 500 entered correction territory on Jan. 26, 2018, and ultimately declined 10%. The S&P 500 entered correction territory a second time on Sept. 20, 2018, and it ultimately declined 19.8%.
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2021: Bitcoin reached a high of $67,617 on Nov. 9, 2021, then declined by 20% during the next three weeks. The S&P 500 entered bear market territory on Jan. 3, 2022, and ultimately declined 25%.
No stock market indicator is perfect. There was no 20% Bitcoin drop preceding the market corrections that started in November 2015 or July 2023, nor did it decline 20% from a high before the bear market that began in February 2020.
However, there is a simple explanation for those absent signals: Bitcoin also had not peaked within 12 months of those events.
Some Wall Street analysts expect a stock market correction in 2024
Right now, many stocks are trading at relatively expensive valuations compared to their historical levels. The S&P 500 currently trades at about 21 times forward earnings, a premium to its five-year average of 19.2 and a more substantial premium to its 10-year average of 17.8, according to FactSet Research. Stretched valuations lend credibility to the idea that the market is due for a correction — and some Wall Street analysts are predicting one in 2024. Marko Kolanovic at JPMorgan Chase has set a year-end target of 4,200 on the index– 23% lower than its current level of 5,460. Similarly, Mike Wilson at Morgan Stanley has set a year-end target of 4,500 on the S&P 500, 18% below its current level.
Interestingly, Wilson has since offered a slightly longer-term outlook that is a bit more optimistic. He says he expects the S&P 500 to trade at 5,400 by May 2025. That estimate does not nullify his year-end forecast, but it does mean he thinks the broad market index will essentially trade sideways for the next 12 months.
Don’t try to time the market, but be ready to buy more if a correction comes
Personally, I never sell stocks in anticipation of a market correction or bear market — for two reasons. First, no stock market indicator is perfect. Second, even if the stock market does decline sharply this year, trying to time the market is a strategy that usually backfires.
Consider this insight from Amanda Lott, Head of Wealth Planning Strategy at JPMorgan Chase.
“Over the past 20 years, seven of the stock market’s 10 best days occurred within just 15 days of one of the market’s 10 worst days. If an investor missed those 10 best days because they were attempting to dodge the down days that surrounded them, their average annualized return amounted to 5.7%. But what if that same investor stayed invested throughout the entire period, taking the bad days with the good? Their annualized return was 9.9% — almost double that of the market timer.”
In short, investors who pull their money out of stocks in their attempts to try to time the market are likely to miss the most important rebound days, and missing just a few of them can lead to long-term portfolio underperformance. That said, I do plan to accumulate some extra cash in my portfolio this year so that I’m ready to capitalize on a market decline should one occur.
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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 has positions in and recommends Bitcoin and JPMorgan Chase. The Motley Fool has a disclosure policy.
This Stock Market Indicator Is Sounding an Alarm Last Seen in 2021. It Signals a Big Move in 2024. was originally published by The Motley Fool
