CHICAGO (Reuters) - What are the odds that the U.S. stock market’s bull run will continue?
Despite last year’s record rise - the S&P 500 and Dow Jones industrial average both closed at all-time highs - it does not always follow that one good year will be succeeded by another. The stock market is often roiled by irrational fears, bubblicious greed and a constantly boiling pot of earnings reports.
Yet many pundits predict that corporate earnings and the global economy will continue to expand, so stocks may have another good year. Just don’t invest thinking you will see a repeat of the 26 percent return the S&P 500 Index posted last year.
A little historical perspective on 2013 may be in order. The most comparable year was 2003, when the S&P Index returned 26 percent. Going back further, you would have to revisit the nifty ‘90s to see better returns: big stocks were up nearly 27 percent in 1998; 31 percent in 1997 and 34 percent in 1995.
What did those years have in common? Relatively low inflation and consistent economic and employment growth. If you see these trends continuing in 2014, odds are your portfolio will benefit.
A continuing bull market will favor investors with broad-based exposure to stocks in the United States abroad. One big-basket fund for global growth is the Vanguard Total World Stock Index ETF, which holds some 5,000 stocks. Represented in the Vanguard portfolio are mega-caps such as Apple Inc, ExxonMobil Corp and Google Inc. The fund was up nearly 23 percent last year and charges 0.19 percent annually for expenses.
For those who are cautious about investing in U.S. stocks after a five-year advance - which is natural - you have to cast the widest possible net. In that spirit, consider the SPDR S&P World ex-U.S. ETF, which invests in nearly every developed country save the United States.
The SPDR fund was up about 19 percent last year and charges 0.34 percent in annual expenses. Its portfolio holds companies like Nestle SA, Samsung Electronics Co Ltd and HSBC Holdings PLC.
One nagging concern harbored by market skeptics like me is that the rally could be interrupted at any moment by some unforeseen gremlin. Rising interest rates could be a negative influence. Since the stock market hates uncertainty, this is always a worry.
Again, history provides some guidance. The average bull market lasts for 61 months, based on market data going back to 1932, according to David Larrabee, writing for the CFA Institute’s “Enterprising Investor” blog, an organization representing chartered financial analysts.
The current bull market - stretching back to March 2009 - is right around that average duration. Does that mean that when the rally hits a half-decade it automatically hits the brakes? Not necessarily.
For one thing, some rallies have gone on much longer than the current one. The largest sustained gains since the onset of the Great Depression were from December 1987 through March 2000, netting a 582 percent return over 12 years, according to Larrabee. (A distant second in bull surges was from June 1949 through August 1956. This post-war rally saw a 267 percent run-up over seven years.)
Another positive lesson from history is that most of these barn-burning rallies came after huge, gut-wrenching declines. Stocks rebounded after investors went through major bouts of discouragement - the “Black Monday” crash of 1987; the dot-com bust of 2000; World War Two; and the crash of 1929 and subsequent Great Depression. While it can be argued that we are still suffering a low-employment hangover from 2008, the market may still move ahead in a marginally improving economic environment.
The most important insight is that you can rarely predict the start or the end of rallies. Who would have thought that some of the biggest returns would have been recorded in the 1930s?
There is only one guarantee in all of this rearview mirroring: You can’t reap stock returns if you are not invested or are waiting for “confirmation” of market signals. Some of the best periods to invest are when the general business news is negative - or just plain boring.
Editing by Beth Pinsker and Matthew Lewis; Follow us @ReutersMoney or here