Why You Shouldn’t Try To Predict What The Market Will Do Next Year…

As the holiday season approaches, we’re also entering another season when pundits begin to make their predictions for what the stock market will do next year.

Predictions are a tough business. Yet, we continue to pursue them, whether it’s the weather, a sporting event, the economy and, of course, how the stock market will perform.

Some forecasters will say the market will continue to rally next year, while others predict the return of volatility along with below-average returns over the next couple of years.

Both sides will, of course, cite statistics to support their theories. One of the more popular ones you might hear is how markets tend to deliver below-average returns after a year when they deliver better-than-average returns (the S&P 500 is up nearly 16% so far this year, which is much better than its historical average of about 9%).

In 1980, for instance, the market rose by nearly a third (32.5%) and in 1981 it fell about 5%. In 1989, stocks soared 32%, only to fall 3.1% the following year.

Nobody knows what the future holds. After all, just as there are examples of times where the market delivers below-average returns after a good year, there are examples of times where we’ve enjoyed extraordinary gains for several years in a row.

For instance, in 1954 the market soared 52%. The next year the market rallied 33%. Then there were the roaring 90s, where the market delivered a string of five years of better-than-average returns.

S&P 500 Total Return
Year Total Return
1995 37.6%
1996 22.9%
1997 33.4%
1998 28.6%
1999 21.0%

There are other examples from the 1930s, 1940s and 1970s that demonstrate that a large gain in one year does not eliminate the possibility of big gains in the following year.

Consider this year, even… Let’s say the market treads water through the end of the year and posts a 15.9% gain. Well, that will come right on the heels of a 16.2% gain last year. The market rallied furiously after the Covid pandemic selloff and surpassed previous highs. Who saw that coming?

The point is, don’t let these predictions — one way or another — influence your investing decisions. These forecasts are aimed at your emotions… and I’ve repeatedly said that emotions can be a portfolio killer.

Action To Take

So rather than focusing on data based on small sample sizes or analysts’ predictions, it’s better to put your money on time-tested tools that have worked under all market conditions.

One of my favorite tools is called relative strength. It’s been tested again and again over more than a century. And it works. Relative strength works to find market winners, but it can’t be used to forecast the direction of the market. But I believe it is more important to follow the market trend than to develop forecasts that are just as likely to be wrong as right.

For now, the direction of the momentum in prices is still up. And like Newton’s first law of motion, which says an object in motion stays in motion until an external force acts on the object to change the motion, the momentum in the market will continue until something causes a change.

Stock market momentum can be derived from various external factors such as earnings, global economic conditions, interest rates and, more recently, the anticipated spending proposals by the White House and Congress.

This analysis won’t help us set a price target, of course. But it should help us maximize profits — and that is more desirable than trying to predict what the market is going to do next.

That means my subscribers and I will continue to ride this trend until further notice.

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