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What to Do After a 25%-Plus Year in Stocks

By Brett Eversole
Monday, December 9, 2013

The stock market is on track to deliver its best yearly performance since 1997...
Does that mean it's time to worry about stock prices?
In short, no. Not at all, actually.
Here's why…
Surprisingly, history tells us that big gains in one year in stocks typically lead to a better-than-average year the next. Said simply, higher prices are a recipe for higher prices.
It doesn't seem rational. But it is absolutely true, based on history.
For the specifics...
Since 1950, the S&P 500 has increased by more than 25% on 12 occasions...
When stocks rise 25%-plus, they have a tendency to perform better than average the following year. Take a look...
Positive Gain %
Observation %
All Periods
After 25%-plus Return

As the table shows, stocks have returned an average gain of 9% a year since 1950. But after a 25%-plus gain, the market tends to beat its average gain... returning 11% a year.
After a 25%-plus gain, our odds of a positive gain are also higher: 83% versus 73% for all years.
Buying now probably goes against your natural instincts... It seems crazy to imagine stocks going higher when we have an economy that continues to sputter, continued high unemployment, and a complete mess of a political system. How could stocks possibly sustain their run like this in those conditions?
But based on history, that's exactly what's going to happen.
The old saying is that bull markets climb a "Wall of Worry." Well, that has been the case this year...
Remember, 2013 started with the fiscal cliff and sequester cuts that were bound to derail the economy and the stock market.
Next, the Federal Reserve began talking about slowing its massive money-printing policy. Slowing down liquidity would surely end this bull market.
Then, there was the government shutdown…and the roll out of the Affordable Care Act… Millions of folks will lose their insurance – with no clear way to sign up for new policies. There was "no way" stocks could rise with that kind of social uncertainty.
Investors who didn't buy because of these fears missed out on big returns. Stocks just continued to climb the Wall of Worry.
We have just as many fears out there today – just as many excuses not to buy. But the historical trend is clear. It says that after a 25%-plus gain, stocks should perform better than average the next year.
I'm sure you can come up with plenty more reasons why the stock market can't go higher in 2014.
Me? I'm betting stocks will go up... that they will continue to climb that Wall of Worry. I suggest you do the same. We have history on our side...
Good investing,
Brett Eversole

Further Reading:

"We are now in about the sixth inning of this great bull market in stocks," Steve Sjuggerud writes. "And I'm confident the biggest profits will happen in the final innings." So even if you already own stocks, "you need to buy more." Get all the details here.
Steve says when it comes to investing, value is relative. "And right now," he writes, "when you size up financial assets, stocks win by a mile." Learn more here: Why Stocks Could Go 50% Higher From Here.

Market Notes

Humana (HUM)… insurance
Progressive (PGR)… insurance
iShares Nasdaq Biotechnology Fund (IBB)… biotech stocks
Yahoo (YHOO)… search engine
Baidu (BIDU)… China's Google
Blackstone Group (BX)... private equity
Kohlberg Kravis Roberts (KKR)... private equity
Morgan Stanley (MS)… financial services
E*Trade (ETFC)… brokerage firm
Interactive Brokers Group (IBKR)… brokerage firm
Charles Schwab (SCHW)… brokerage firm
American Express (AXP)… credit cards
Visa (V)… credit cards
Las Vegas Sands (LVS)… casinos
Wyndham Worldwide (WYN)… hotels
Wal-Mart (WMT)… retail giant
Amazon (AMZN)… online retailer
Apple (AAPL)… Big Tech
Microsoft (MSFT)… software
Constellation Brands (STZ)... booze
General Motors (GM)… cars and trucks
FedEx (FDX)… shipping
Union Pacific (UNP)… railroads
ONEOK (OKE)… natural gas
Cheniere Energy (LNG)… natural gas exports

Newmont Mining (NEM)... gold stock
Goldcorp (GG)… gold stock
Kinross Gold (KGC)… gold stock
Yamana Gold (AUY)… gold stock
Exelon (EXC)… utility stock
Westport Innovations (WPRT)... natural gas engines
Annaly Capital (NLY)... mortgage REIT
Hatteras Financial (HTS)… mortgage REIT

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