The November markets gave us much to be thankful for. Stocks were up around 3% for the month with the Dow Jones Industrial and S&P 500 indices both hitting new all-time highs. As the portfolio barometer indicates, 2013 has been a very good year for stock investors. Bonds continue to be treading water as rates meander in a slow, upward direction. We have been cautioning investors of the dangers that lie ahead for bond investments if interest rates really begin to increase. What lies ahead for stock investors?
Around this time last year, we were optimistic about the stock market and encouraged investors to be at their personal stock maximums. However, we were not expecting the heralded returns that 2013 has provided. If you recall, 2009 through 2011 were filled with false signals, volatility and head fakes worthy of a Heisman-caliber running back. Because 2012 still had periods of volatility, we thought we might experience another year or two of choppy markets before the Mega-Bear ice age was finally over. With the S&P 500 up around 38% over the past 18 months (15 of those 18 months having positive returns), it is apparent to us that we have begun a new era of post-ice age behavior.
“Post-ice age behavior” doesn’t mean we expect 20%+ returns each and every year. However, if the stock market continues its century-long tradition of yielding an average annual total return of 10 to 11%, and we just experienced a decade of abnormally low returns, then we should not be surprised if we experience a prolonged period of abnormally high returns. Unfortunately, even prosperous stock market eras have months and even years of negative returns, which test our nerve and dare us to sell out of stocks at possibly the worst moment. At the end of the day, stock investing comes back to the age-old challenge of putting time in the market instead of trying to time the market.
In the January 2013 monthly summary, I addressed the same concerns that many are asking today. Have we gone too far, too fast? An interesting study by Riverfront Investment Group looked at every year since World War II that had stock market returns of over 20%. There were 17 calendar years that met this milestone. Of those 17 instances, only 3 proceeding years had negative returns and each of those 3 years involved economic recessions. The average return of the other 14 proceeding positive years was an 11% gain. Of course, past performance is not an indication of future results and stock pullbacks are to always be expected. However, there is evidence to support that good years tend to be followed by more good years.
There will be challenging times ahead, without a doubt. Let us handle them as they come, but in the meantime enjoy our families, loved ones, and celebrate the holidays with a passion!
Index information is used to represent market performance, but you cannot invest directly in an index. Past performance is not indicative of future results.
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