The Nasdaq Just Hit a New High for the First Time Since 2021. The Stock Market Usually Does This Next.

The Nasdaq Composite (NASDAQINDEX: ^IXIC) is one of three major U.S. stock market indexes, alongside the S&P 500 and Dow Jones Industrial Average. The Nasdaq measures the performance of more than 3,000 companies that span all 11 market sectors. But the index is widely regarded as a benchmark for growth stocks because it’s heavily weighted toward technology and consumer discretionary, the two best-performing sectors over the last two decades.

On Feb. 29, 2024, the Nasdaq reached a new high for the first time since Nov. 19, 2021. That means the index is officially in bull market territory. Historically, the beginning of a new bull market has portended sustained price appreciation across the stock market.

Here’s what investors should know.

History says the Nasdaq Composite could soar 156% over the next 26 months

Some investors use the term bull market loosely, often to describe a financial index that has advanced 20% from a recent low. But that definition is somewhat incomplete. A bull market happens when two specific conditions are satisfied: (1) The index in question must rise at least 20% from its bear market low, and (2) the index must also reach a new high.

That second point is tricky because a bull market technically starts when the index hits a bear market low. But it is impossible to recognize a low point in real time. Instead, investors must wait for the index to reach a new record high before they can be certain a new bull market has started. In other words, there is always a lag between the onset of a bull market and the point when it becomes official.

For instance, the current Nasdaq Composite bull market started when the index hit a bear market low on Dec. 28, 2022. The index has since risen 59%, satisfying the first condition. But the second condition was not satisfied (meaning the bull market was not official) until 14 months later, when the Nasdaq reached a record high on Feb. 29, 2024.

The chart below provides details on every Nasdaq bull market since 1990.

Data source: YCharts. Note: Percentages and averages have been rounded to the nearest whole number.

Since 1990, the Nasdaq has returned 215% during the average bull market, and those returns were realized over an average of 1,223 days (about 40 months). We can apply that information to the current situation to make an educated guess about the future. As mentioned, the Nasdaq has already advanced 59% during the first 14 months of the current bull market. So, that leaves an implied upside of 156% over the next 26 months.

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Investors should treat that as an estimate. Every bull market is unique in its circumstances. For example, the current one follows a global pandemic that prompted the government to spend trillions of dollars on stimulus projects. That led to the worst inflation since the early 1980s, causing the Federal Reserve to raise its benchmark interest rate at its fastest pace in decades. There is no precedent for those events, so this Nasdaq bull market may play out differently than history suggests.

Moreover, while the Nasdaq returned 215% during the average bull market since 1990, its performance also varied widely from one event to the next. For instance, the Nasdaq rose just 26% during the bull market that started in 2008, but the index soared 539% during the bull market that started in 2009.

A better way for investors to think about the future

Many factors conspired to push the Nasdaq Composite into bull market territory. The economy has remained remarkably resilient in spite of elevated interest rates. Wall Street is fascinated with artificial intelligence stocks, especially Nvidia and other members of the “Magnificent Seven,” which account for nearly 50% of the Nasdaq by weight. And investors expect the Federal Reserve to cut interest rates in the near future. Those tailwinds could push the Nasdaq much higher in the coming months and years.

However, the current situation could play out much differently. Stubborn inflation could force the Federal Reserve to raise its benchmark interest rate even higher, which could suppress consumer spending and business investments to a greater degree. In turn, the U.S. economy could slip into a recession, and that would almost certainly lead to a significant decline in the stock market.

Ultimately, there is no foolproof way to forecast the future, but making assumptions based on past bull markets is a particularly bad strategy. However, it makes more sense to consider the Nasdaq’s performance across all market environments over an extended period.

With that in mind, the Nasdaq has returned 3,480% since 1990, compounding at 11% annually. That time period encompasses enough different conditions, from economic booms and bull markets to recessions and bear markets, that investors can be reasonably confident of similar results in the future.

That does not mean the Nasdaq will increase 11% every year. The index will move higher in some years, and it will decline sharply in other years. But history says the Nasdaq will return roughly 11% per year over the next three or four decades.

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Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

The Nasdaq Just Hit a New High for the First Time Since 2021. The Stock Market Usually Does This Next. was originally published by The Motley Fool