For well over a century, Wall Street has been a wealth-creating machine. Though other asset classes have been successful in helping investors grow their nominal wealth, including real estate, bonds, and commodities such as gold and oil, nothing has come remotely close to matching the annualized returns of stocks over extended periods.
But just because Wall Street is unmatched in the annualized return column over the long run, it doesn't mean stocks aren't susceptible to periods of instability.
Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »
Over the last two months, the Dow Jones Industrial Average(DJINDICES: ^DJI), benchmark S&P 500(SNPINDEX: ^GSPC), and growth-propelled Nasdaq Composite(NASDAQINDEX: ^IXIC) have all declined by double digits. The former two have fallen into correction territory, with the Nasdaq Composite officially entering a bear market on April 8.
We've also witnessed some historic bouts of volatility in April for these major stock indexes. For instance, the S&P 500 endured its fifth-worst two-day percentage decline (10.5%) in 75 years from the closing bell on April 2 to the close on April 4, as well as its largest single-day point gain in history on April 9.
Image source: Getty Images.
When stocks vacillate wildly and/or take the elevator down, it's normal for investors to seek out forecasting tools or data points that might offer insight into where Wall Street's major indexes are headed next. Even though no such predictive tool exists that can guarantee what will happen next, a small number of metrics and events have strongly correlated with moves higher or lower in the Dow Jones, S&P 500, and Nasdaq Composite throughout history.
On April 24, one of these rare Wall Street events was triggered for only the 19th time since the start of 1945, and it (thus far) has a flawless track record of forecasting which direction stocks will move next.
Fear and uncertainty rule the roost on Wall Street (for now)
Before examining this exceptionally rare event that should put a big smile on the faces of investors, let's first touch on the variables that have incited the fear and uncertainty that have led to historic nominal-point and percentage swings in the Dow, S&P 500, and Nasdaq since April began.
Arguably, the biggest catalyst to Wall Street's supercharged volatility has been President Donald Trump's tariff policy. On April 2, Trump announced a 10% global tariff and introduced higher "reciprocal tariffs" on a few dozen nations that have historically run trade deficits with America. These reciprocal tariffs are on a 90-day pause (as of April 9) for all countries except China. While the president's goal is to raise revenue, protect American jobs, and make U.S. goods more price-competitive with those being brought in from overseas, there are a lot that can go wrong.
For instance, there's the potential for the prevailing rate of inflation to reaccelerate. Investors have cheered a decline in peak inflation rates from north of 9% in 2022 to less than 3% currently. But with the Trump administration's lack of clarity between input and output tariffs, the added duties on the former run the risk of raising prices and making domestic goods less price-competitive with those being imported from overseas.
Additionally, the president and his team haven't succeeded in laying out a cohesive message. Everything from the goods subjected to tariffs to the tariff rates themselves has regularly changed. A lack of transparency is undoubtedly unnerving investors.
The stock market has also been gyrating due to concerns about rising long-term Treasury bond yields (10-year and 30-year), as well as the U.S. economic outlook weakening.
Although higher Treasury bond yields will put a smile on the faces of conservative, income-seeking investors, they also indicate that the cost of borrowing is rising. Higher lending costs are usually a drag on consumers and businesses.
Meanwhile, the Atlanta Federal Reserve's GDPNow forecast is calling for a 2.5% contraction in the U.S. economy during the first quarter, as of an April 25 update. The last time the U.S. economy endured such a steep economic decline in a non-COVID-19 pandemic quarter was at the end of the Great Recession in 2009.
Image source: Getty Images.
This unique event has a 100% success rate of forecasting future stock moves
To be clear, there's no timetable as to when tariff-related uncertainty and the U.S. economic outlook will become more transparent. Trying to predict short-lived moves in equity markets based on day-to-day headlines is nothing more than a flip-of-the-coin guessing game.
But every so often, a correlative event comes along that has such a high success rate of forecasting future stock moves that investors would be unwise not to pay attention.
On April 24, a technical indicator developed by late stock market analyst Martin Zweig, known as the Zweig Breadth Thrust (ZBT), triggered for only the 19th time in the last 80 years. The Zweig Breadth Thrust is a market momentum-driven indicator that measures the ratio of advancing stocks to the total number of advancing and declining stocks (what's commonly known as "market breadth").
The Zweig Breadth Thrust is triggered when there's a rapid advance in equities, which, as history has shown, often occurs near elevator-like moves lower in the Dow, S&P 500, and Nasdaq Composite. The ZBT typically signals when the 10-day moving average of advancing stocks on the New York Stock Exchange climbs from less than 40% to north of 61.5% in 10 or fewer trading days, and volume also climbs.
But what really stands out is the performance of the benchmark S&P 500 in the wake of these ZBT triggers.
As you can see in the post above from Carson Group's Chief Market Strategist Ryan Detrick on the social media platform X, the ZBT has positively signaled 18 times since the start of 1945, with April 24 marking the 19th occasion. At the six-month and 12-month marks following the trigger of the ZBT, the S&P 500 was higher 100% of the time (18-for-18)!
To build on this point, the S&P 500 didn't just deliver historically average gains following Zweig Breadth Thrust triggers. The average 12-month return was 24%, which more than doubles the average annualized return of the S&P 500 over the long term, which is closer to 10%. In other words, the Zweig Breadth Thrust has a knack for signaling the start of a new bull market or the continuation of an existing one following a notable correction.
Admittedly, technical indicators can't hold a candle to the true bread and butter of what makes businesses tick: their operating results. Ideally, corporate earnings growth and a favorable environment for businesses to hire, innovate, and acquire will provide a solid foundation for the Dow Jones, S&P 500, and Nasdaq Composite to head higher.
Nevertheless, the ZBT provides yet another example of optimism and time being the greatest allies of investors. Regardless of how dire the headlines may seem over short timelines, the long-term growth of the U.S. economy and the public companies that benefit from a steadily expanding economy provide the impetus to push stock valuations to new heights.
Should you invest $1,000 in S&P 500 Index right now?
Before you buy stock in S&P 500 Index, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and S&P 500 Index wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider whenNetflixmade this list on December 17, 2004... if you invested $1,000 at the time of our recommendation,you’d have $594,046!* Or when Nvidiamade this list on April 15, 2005... if you invested $1,000 at the time of our recommendation,you’d have $680,390!*
Now, it’s worth notingStock Advisor’s total average return is872% — a market-crushing outperformance compared to160%for the S&P 500. Don’t miss out on the latest top 10 list, available when you joinStock Advisor.
Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
