History quiz for the new year: What happens after a really strong year in the stock market? Does the market then usually go up, down, or sideways?
This is a more important question than many would count it. History repeats itself in many instances because people usually act according to their nature, that is, habitually. Everyone talks about buying low and selling high, but they usually don’t practice it. People usually act upon emotion rather than logic. We’ll return to the history in a minute.
I am generally optimistic about stock prices in 2014 for several reasons. First, many do-it-yourselfers have remained out of equities. Being so badly burned in the 2000’s, they are still sitting on their mountain of cash. If they have invested, it has been in bond funds. As I have discussed in this space before, the bloom is off of that rose.
As bond results worsen and they see the sky continuing to fail to fall, they will begin to invest in stock funds or stocks again. It is rather amazing that the Dow and S&P indexes have recovered finally, just on the strength of professionals and institutions with trillions of cash still on the sidelines.
Second, technological advances in a number of areas of the economy are driving tremendous gains in productivity and product innovation. 3-D printing as a manufacturing process is one that most easily comes to mind. If you examine it, it may blow your mind about what is already being accomplished. Visit www.tamicare.com to see how and what a Manchester, England company is making with its new fabric called Cosyflex.
Third, much of the recent political disturbance has been steadily lessening. Politicians have promised us in the past several years that if we didn’t pass this new program, quash this program, raise the debt ceiling, hold the ceiling fast, blah, blah, blah, that the sky would finally shatter and fall.
Instead, like the reasonable folks we are, we have just gotten up each day and done our duty as we see it, producing more from less, faster and cheaper. Most of us no longer believe them when they cry anything.
I could on with a few more points, but we will soon enough know whether I am right in my hopefully educated guess for next year. For historical perspective, you have to return to 1997 as a year in which the S&P 500 scored a bigger gain than 2013, 31 percent. The next two years were also double digit gains, although they declined to 26 and 19 respectively. With a party division between President Clinton and part of Congress, the political situation was similar to the current one. Wall Street generally loves Do Nothing Government.
That year also happened to be a first full year in the presidential cycle. Year 2009 also produced a nice 26 percent gain after the debacle of the bursting real estate bubble. The next year provided a respectable 12.7 percent gain before politics ruined 2011’s markets (the debt ceiling standoff).
Sticking out my neck so it will be easier to chop off, I think the S&P will rise by this time next year by a double digit percentage. I will say 16 just to be proven incorrect. With this information and $6, you should be able to get a cup of most offerings at Starbucks. Remember, nothing in this physical life is guaranteed except taxes and death.
(Past performance is no guarantee for future results. Advice is general in nature and you should consult a professional for your specific situation. S&P 500 Index returns derived from www.1stock1.com.)
