After a tumultuous descent into a bear market in 2022, the S&P 500 Index (SPX) staged an impressive recovery throughout 2023. However, as we step into 2024, the SPX has shown signs of faltering, unable to surpass its 2022 peak and beginning to decline in the first week of the new year. While predicting the future is always a challenge, there are several cautionary indicators that investors should consider.
A key concern is the yield curve inversion witnessed in 2022-2023, a historical precursor to recessions, potentially signaling economic downturns in 2024-2025. This pattern mirrors those seen before the market downturns in 2000 and 2007. The chart below illustrates the correlation between the SPX and the 2-year to 10-year yield curve. This curve notably inverted and began to steepen just before the 2000-2003 bear market and the 2008 Great Recession. A strikingly similar pattern has been developing over the past 12 months: the curve inverted in mid-2022 and is now steepening once again.
SPX and Yield Curve
Additionally, there is one more peculiar similarity between the 2000 and 2007 tops. In both cases, the S&P500 index formed a bearish Double Top pattern. The 2022-2024 chart of the S&P 500 Index suggests the potential formation of another such pattern. While it's premature to definitively state that this pattern will mirror those of 2000 and 2007, it's prudent for investors to remain vigilant about this possible bearish development.
SPX, 2000 Top
SPX, 2007 Top
SPX, 2024
As we navigate these uncertain times, staying informed and prepared for various market scenarios is more important than ever.