wealtharticles-will_stocks_soar_after_this

Will Stocks Soar after This Carnage? - By Dr. Steve Sjuggerud

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.

www.dailywealth.com