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Article:
History Rhymes With A Bull Market In Stocks by: John Allison Mark Twain said, 'History does not repeat itself, but it does rhyme a lot.'¯ In our business, it is standard practice to find that 'rhyme'¯ by studying financial market trends, hoping to achieve future investment returns with past investment history. One trusted study is a table of stock market returns over rolling ten-year periods using the S&P 500 Index as an equity benchmark and an accurate measure of stock market performance. Some economic analysts predict a sideways, or flat return in stocks for the rest of the decade while others believe that we are in a Bear Market correction'”with a downward slide in prices on the horizon. Using the research featured in this report, we justify our endorsement of an all-equity position for investment portfolios, explaining why we subscribe to neither of the aforementioned forecasting positions. The table shows calculations for the rolling ten-year compounded annual returns of the S&P 500 Index from 1926 through 2004. The worst ten year compounded annual return occurred the period ending in 1938 (-0.90%). The best annual returns occurred the period ending in 1958 (20.06%). The average annual return for all 79 years studied was 10.4%'“consistent with the oft-quoted long-term return for the stock market. Through close study of the data, we see a strong argument against today's pessimistic forecasts for the remainder of this decade. Assuming stock prices generate the sideways movement some predicted for the remainder of the decade, the rolling ten year compound rate of return through 2010 must show an 2.5% loss annually for the next six years'”making this decade the worst decade of stock ownership in the 79 year period of our study, worse than the ten year period encompassing the Great Depression. Whatever risks confront us today, there is no reason to anticipate the kind of economic extremes the investment markets experienced in the 1930's. Corporate earnings are at record highs, and corporate balance sheets are in the best shape they have been in for over 40 years. Economic growth is at about 3.5% annually, with inflation tracking at only 2-2.5%. Corporate investment spending is up, while jobs are being added every quarter since early '2004
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