As the year draws to a close and the holidays approach, your thoughts may be focused on festivities and gift shopping rather than investment strategies. You might even think that purchasing stocks at this moment is not wise, considering the significant gains already seen in the three major stock indexes.

With fewer corporate announcements coming in, could the chances for further gains really be limited? The S&P 500 (SNPINDEX: ^GSPC), Nasdaq, and Dow Jones Industrial Average are projected to end the year with increases of 26%, 29%, and 18%, respectively.

Nevertheless, the positive factors driving this growth still appear to be influential, with enthusiasm around the artificial intelligence (AI) surge and optimism regarding a potential shift to lower interest rates. This may catalyze performance in both the upcoming weeks and into the new year.

With this in mind, is it a good idea to buy stocks before the new year? Let’s delve deeper and see what history reveals.

Entering a bull market

To begin with, let’s examine how the stock market has performed this year. The S&P 500 confirmed its position in a bull market right at the start of the year and went on to reach several record highs. The other key indexes also rose as investors speculated on new market growth stimuli. Development in AI gained momentum, with companies such as Nvidia, a chip producer, and Broadcom, a networking giant, seeing substantial rises in their stock values over the past few years.

Additionally, investors have been drawn to favorable economic indicators, believing that potential interest rate reductions could help bolster consumer spending and improve corporate borrowing, investing, and growth. This past fall, the Federal Reserve enacted two rounds of rate cuts, marking the start of this new lower-rate landscape. There’s even speculation about another rate cut likely happening at the upcoming Fed meeting on December 18, according to the CME FedWatch tool.

At the same time, gains in the S&P 500 have led to heightened stock valuations, with the S&P 500 Shiller CAPE ratio exceeding 35 — a level not seen often since the S&P 500 was established as a 500-stock index in the late 1950s.

The Shiller CAPE ratio is a useful valuation metric as it adjusts for inflation and incorporates earnings per share and stock prices over a decade. This suggests that the overall stock market appears to be quite pricey at present compared to historical averages.

Given this, many investors might think it wise to hesitate before diving into stocks before year-end.

The S&P 500 in the last decade

Now, let’s turn our attention to historical trends. In the past ten years, the S&P 500 has risen in December six times:

However, in years such as 2022, 2018, 2015, and 2014, it experienced declines of 5.9%, 9.1%, 1.7%, and 0.4% respectively. Notably, the larger downturns occurred during overall challenging market years.

For instance, in 2018, the S&P 500 dropped due to widespread economic fears, particularly regarding a potential slowdown in China’s economy. Similarly, significant inflation and rising interest rates were responsible for stock market dips in 2022.

If we disregard the tougher years and analyze the overall trend, those who invested in the index, perhaps through an S&P 500 fund, or selected the right combination of stocks, tended to profit by buying in early December.

Is now the right time to buy?

Let’s return to our original question: Given the current conditions, should you make stock purchases before the year’s end?

Historical data suggests that December has been more often favorable than unfavorable for stocks, lending support to the notion of investing now. However, it’s important to remember that past performance does not guarantee future results, and the market may take unexpected turns. Currently, the market does appear quite costly.

But don’t allow this blend of advantages and disadvantages regarding investment timing to dishearten you. The positive takeaway is that any moment can potentially be the right moment to invest in stocks, and here’s why.

Firstly, even in a pricey market, there are still quality stocks available at fair prices. Secondly, if you maintain a long-term investment perspective, short-term market fluctuations won’t significantly affect your returns over several years.

Thus, this can be a wonderful time to consider buying stocks if you find appealing opportunities. However, with your long-term investment strategy in mind, there’s no need to hurry into a decision.

Adria Cimino does not hold any positions in the stocks mentioned. The Motley Fool holds positions in and recommends Nvidia and Broadcom. The Motley Fool has a disclosure policy.

The Motley Fool is a YSL News content partner that provides financial news, analysis, and commentary aimed at helping consumers make informed financial decisions.

This content aims to empower individuals to manage their finances effectively. It is developed independently from YSL News.

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