Thursday, January 2, 2014

The Stock Market in 2014: We Don't Know

The Stock Market in 2014:  We Don't Know

The S&P500 ended 2013 with a total return of 32.4%.  That’s the twelfth highest return since 1928, and the best since 1997.  As I’ve been driving around Westchester County listening to the radio, I’ve heard all sorts of predictions.  Some pundits are warning that 2014 may not be kind to investors because this past year was so spectacular.  Other experts believe that the market has developed momentum that will push it even higher.  While it is unlikely that next year’s return will top this year’s result, there’s no particular reason to expect a bear market.
Marketing Due Up (1999)
On a few occasions, the S&P 500 continued to soar.  For example, in 1954 the market was up 53% and then rose 33% the following year.  From 1995 to 1999, the index rose 37.2%, 22.7%, 33.1%, 28.3%, and 20.9%.  So should we be bullish about the upcoming year?  Not necessarily.  For instance, after rising 31.9% in 1936, it fell by 35.3% in 1937.  Sometimes the market falls after a strong year, sometimes it climbs yet again, but most of the time it is somewhere in between.   On average, the market rises by about 9% in the year after it rose by 30% or more with lots of variation.

As a long-term proposition stocks rise by about 8% to 10% with an annual volatility of about 20%.  This means that there’s about a two in three chance that the market will return somewhere between a decline of 10% and a rise of 30%.   In other words, we really don’t know what’s going to happen to the stock market in any given year.  Long-term investors should ignore prognosticators.

1 comment:

  1. Well put... we do know the market will go up... or down! And a tiny, tiny, remote possibility it will remain exactly flat!