The Investment Scientist

Stock Market: What Will 2014 Bring?

Posted on: December 20, 2013

Image2013 has been a stellar year for stocks. As of today, the S&P 500 is up more than 25%. There are about ten trading days left and barring unforeseen circumstance, the index will end the year in the 20+% range.

A few of my clients are concerned; with the market doing so well this year, what does that bode for 2014? Well, I don’t have a crystal ball, so all I can do is to look at historical data to make an imperfect reference.

To answer the question, I asked my intern Nahae Kim to do a study of the relationship of immediately subsequent year returns. Specifically, can one year return predict the next year?

Firm | Youtube | Facebook | Twitter | LinkedIn | Newsletter

This is the chart she got. The X-axis represents current year returns and the Y-axis represents the immediate subsequent year return.

 

As you can observe with your naked eyes, the plots are scattered everywhere. There does not seem to be any obvious predictability based on this graph.

Next, I asked her to pick out specifically those years that yielded 20+% returns.

There are ten such years, and I asked her to look at the immediate subsequent year returns. Here is the table she got.

Cur Yr

Return

Nxt Yr

Return

1955

26%

1956

3%

1961

23%

1962

-12%

1967

20%

1968

8%

1980

26%

1981

-10%

1985

26%

1986

15%

1989

27%

1990

-7%

1991

26%

1992

4%

1996

20%

1997

31%

1998

27%

1999

20%

2003

26%

2004

9%

Average

24.70%

Average

6.10%

Vol

2.71%

Vol

13.65%

Here is the summary of the statistics:

1. The average subsequent year return is 6.1%, lower than the average historical S&P 500 return of 10%.

2. In 3 out of the ten years, the market saw losses. In only 1 of the 10, the market saw a subsequent year return more than 30%.

So here is my imperfect prediction based on historical data, the S&P 500 will most likely NOT repeat its stellar return this year. It will more than likely deliver a return lower than the historical norm. 

Let me know if this helps.

Request White Paper | Request Discovery Meeting

1 Response to "Stock Market: What Will 2014 Bring?"

Interesting. I would take 6.1% in a world where money market rates are 0.1%, the 10 year Treasury note is 2.85%, and the Federal Reserve’s annual inflation measure is below 1%.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

Error: Twitter did not respond. Please wait a few minutes and refresh this page.

Follow

Get every new post delivered to your Inbox.

Join 74 other followers

%d bloggers like this: