I have just concluded a study of all nine years in which the S&P 500 gained 30% or more. That's nine years out of 85, since the S&P 500 begins with the year 1928. Here is a chart of those nine super-successful years for stocks:
Four factors leap to mind to explain these great years. But none of them work.
- One might think is that a booming stock market equates with a booming economy. Good data are available for only seven cases, and in only two cases did the U.S. gross domestic product (GDP) grow 3% or more. Those were 1945, the last year of World War II (with 8.1% growth) and 1997, during the Internet boom (4.5% growth). In three cases -- 1954, 1958 and 1975 -- GDP growth was actually negative for the year.
- Perhaps inflation is a key variable? Not reliably. The inflation figures in the hot-market years ranged all over the place, from negative 1.2% to positive 6.9%.
- I expected stock valuations would play a key role, but you can't prove it from the data. The average price/earnings ratio on stocks ranged from about 10 to 22, with an average of about 15 – which also happens to be the average for normal years.
- Then there's the federal deficit. I looked at the deficit as a percentage of GDP in the eight market-boom years for which I could find data. It ranged widely, from 0.3% of GDP in two cases to 21.5% of GDP in 1945. In none of the nine great years did Uncle Sam run a surplus.
Two other factors do seem to work reasonably well. The boom years correlate with strong economic growth in the following year in seven of eight cases (for which data is available). The average economic growth figure the year following a 30%-plus year in the stock market was 5.2%.
Even that correlation isn't infallible. After the market soared in 1945, the U.S. economy contracted 10.9% in 1946 in a wrenching recession. Another finding that struck me was that eight of the nine best stock-market years happened in peacetime. The only exception was 1945, the year World War II ended.
Could 2013 be a 30% up year for stocks? It's not impossible. But to make a good guess, you'd have to have a crystal ball about economic growth in 2014.
My own prediction, for what it's worth, is that stocks will be up 10% to 12% in 2013, which will make it a slightly better-than-average year.