Will Stocks Soar after This Carnage?

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Will Stocks Soar after This Carnage?

By Dr. Steve Sjuggerud
Friday, November 7, 2008

Stocks have had a terrible 12 months... the second worst on record going back to 1950.

But does a terrible 12 months mean we should have great returns going forward?

Does the "law of averages" somehow kick in here? Does a bad year beget a good one? We crunched the numbers to find out...

At DailyWealth, we try to be optimistic. We believe opportunity always exists somewhere, and it's our job to find it.

Of course, we know about all the bad things going on now. But we also know that great returns in stocks start in bad times. Stocks typically bottom right in the middle of recessions, for example. This recession has been going on for a while now... So are we at the middle of it yet? Is it time for stocks to soar?

Unfortunately, history doesn't tell us what we want to hear...

A good analyst doesn't start with a conclusion and look for facts to back it up. Instead, he looks at facts, and makes his conclusions. In this case, we looked at these facts to draw our conclusions: "rolling" 12-month returns on stocks and how they performed over the following one, three, and five years.

The reality is, stocks only performed worse than the 12 months prior just once since 1950, as measured by the S&P 500 and the Dow. That month was September 1974. Those 12 months were followed with a good 12 months... But the returns beyond that were pretty bad – nearly flat after the decent first year.

That's only one example though. To get more, we had to dig deeper.

We had to go all the way back to the 1930s and the Dow. And once again, the results weren't good... Since the 1930s were a terrible time for stocks, we had multiple 12-month periods just as bad as today. Twenty-nine(!) months in the 1930s had worse 12-month returns than what we just experienced. On average, the market was down 3% a year later.

Expanding the universe even more to the Nasdaq, many 12-month periods in 2001 had worse returns than the Nasdaq's return over the last 12-months. Once again, after a terrible year, the average returns a year later were negative again. In short, 2002 was another bad year in U.S. stocks.

In both the Dow in the 1930s and the Nasdaq after 2001, the three-year and five-year returns were also subpar.

The conclusion is simple, and not what we expected to find...

When stocks have a terrible year – as bad or worse than the year we've just experienced – it doesn't necessarily mean they'll have a good performance in the following years. As they say, past performance is no guarantee of future results.

In DailyWealth, we'll stick with what we've found works... buying exceptional value, when investors are extremely scared and we have the start of an uptrend in place.

Right now, we have the first two... but we're still missing that legitimate uptrend.

We suggest you bank on value and sentiment (as Buffett says, "Be fearful when others are greedy and greedy when others are fearful"). And don't give any credence to the notion that a good year must follow a terrible one.

Sticking with what works will keep you in the money.

Good investing,

Steve

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

Further Reading:

The Key to Your Investment Survival Next Year

What's Gonna Happen Next?

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THANKS, CITIGROUP. WELL DONE. REALLY... WELL DONE.

We've checked and checked, and we are now sure – Citigroup wasn't joking when it "downgraded" shares of Foster Wheeler (FWLT) yesterday.

Foster Wheeler is one of the world's largest engineering and construction companies... the builders of roads, bridges, ports, refineries, pipelines, and other huge energy projects. We watch this stock for the same reason we watch Freeport-McMoRan. It's one of the big "bell cows" of infrastructure and commodity demand.

Like all infrastructure shares, FWLT has been clobbered this year. Shares are down 68% from their summer highs. Now, here's where it gets funny: Analysts from Wall Street giant Citigroup just cut their rating on the company from "buy" to "hold." It seems they've finally noticed global economic weakness will hurt profits. No doubt Citi's clients are thinking, "Now ya tell me!"

Citigroup shares are down 75% since June 2007 because the company thought investing in loans people couldn't pay back was a good idea. Our suggestion to shareholders of Citi: Hire a gang of chimpanzees to manage the company and perform analysis for you. They'll do the same job for much less pay.

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