History Suggests S&P 500 Heading to Record High After Thanksgiving: These Stocks May Be a Better Play
2min read As Thanksgiving approaches, the shopping season kicks in with Black Friday and Christmas ahead. It's no surprise that we might see another record-breaking fourth quarter, driven by robust consumer spending, tight labor market, with solid stock returns this year. Historical trends suggest that the good news for stocks is not over yet.
Investors favor the fourth quarter, as it is typically the best quarter of the year for the stock market. On average, the S&P 500's Q4 returns have been 3.1% since 1930, compared with 1-2% in Q1-Q3. Two consecutive years of 20%+ annual returns may further bolster investor enthusiasm, reinforcing the belief that the bull market will continue.
Data from the past four years supports this idea. The S&P 500 has consistently seen positive returns after strong performance up to Thanksgiving. The index returned 1%, 3%, and 5% respectively from Thanksgiving until the end of the year in 2020, 2021, and 2023, following double-digit returns by Thanksgiving. In 2022, however, bearish sentiment persisted due to underperforming stocks.
With the S&P 500 up 26% so far this year, stocks are likely to stretch further, supported by a better-than-expected economy, incoming Trump tax cuts, and the Fed's monetary easing. There are always reasons for investors to reposition into stocks, with less predicted risk, unrealized gain buffers, and a bright outlook ahead, making them more willing to hold stocks now.
Apple and Meta Deliver Surprise
Institutions and retail investors may continue to bet on the Magnificent 7 (Mag 7) tech giants through the end of the year, given their strong fundamentals, lower idiosyncratic risk, and stable cash flow. These stocks generally move with the overall market, so if the S&P 500 grows further, the bigger stocks can grow bigger.
Among the Mag 7, Apple and Meta have outperformed the benchmark on average during the Thanksgiving to year-end period over the past four years, with controlled volatility. Apple and Meta generated average returns of 3% and 2% respectively, compared to the S&P 500's 1%. Apple performs well in bull markets, with shares jumping 14%, 10%, and 1% in 2020, 2021, and 2023, respectively. Meta fares better in bear markets, with shares jumping 7% in 2022 but declining 1% in 2020 and 2021.
For a safer bet, Microsoft is a good option. The stock has remained relatively stable during the Thanksgiving to year-end period over the past four years, with an average return of 0% and the lowest volatility among the Mag 7. Given Microsoft's 13% growth so far this year, below the S&P 500's 26%, holding the stock could still provide upside with limited risk.
Avoid Nvidia? Tesla is Gamble Bet
Nvidia is not recommended at this time. On average, the AI giant's shares have tumbled 5% over the past four years during this period. Even in bull markets, investors preferred to cash out the stock. This can be partly attributed to robust returns in recent years, especially with the stock soaring 173% year-to-date and recent sell-off after unimpressive Q3 results. While the future remains bright, it may be best to avoid Nvidia for now.
Tesla is more controversial. The stock jumped 34% this year and 56% from its October low, mainly due to Elon Musk backing Trump's election win. Tesla is the most volatile stock among the Mag 7, with an average return of -2% but 23% volatility during the Thanksgiving to year-end period over the past four years. However, in bull market years, the stock tends to compensate with higher returns than peers. For speculative investors, Tesla could be a good choice.
Overall, Apple and Meta are good holds until year-end, Microsoft is stable, while Amazon, Google, and Nvidia are not recommended. Tesla can be a bold bet. Although history cannot predict the future, it can provide valuable reference points.
Some may consider retail stocks given solid consumer spending. However, Walmart, Target, and Costco have posted average returns of -2%, -2%, and 1% during this period, respectively. Despite consumer spending, these stocks are usually already priced in, and the risk-return may not be as favorable compared to tech giants. Additionally, Walmart's 77% rally may not suit defensive purposes.
In conclusion, the S&P 500 has room to break another record high after Thanksgiving, driven by tech enthusiasm and a favorable macro environment. History suggests Apple and Meta are safer bets with potential payoffs, Tesla is more speculative, but Nvidia is not recommended currently. The bull market is still here, so enjoy the rest of the year.
