It's an especially tantalizing prospect right now, after nba jerseys the market's surge over the last nine months of 2009. Investors would love to see that trend continue into this year.
Unfortunately, though, there is precious little statistical support for it.
Consider the yearly returns of the Dow Jones industrial average since 1896, the year the index was created. The Dow rose in 73 of those years. And in the year after each of those climbs, it rose 64 percent of the time. That's statistically indistinguishable from the 65 percent frequency with which the Dow rose after years when the index fell.
These results suggest that the market's performance in 2009 doesn't increase the probability of a net gain in 2010. (The good news, of course, is that high frequency of yearly gains. That means you're likely to make money if you buy and hold a broad portfolio of top stocks for 2011.)
Let's slice the market another way. Growth stocks outperformed value stocks last year. Investment newsletters often argue that this means growth stocks are likely to do so in 2010 as well. Though not every adviser agrees on how to define these two types of stocks, researchers generally rely on the ratio of price to book value per share. Stocks with the highest ratios are deemed growth stocks to buy, while those with the lowest ratios are considered value stocks.
Using these definitions, the finance professors Eugene F. Fama of the University of Chicago and Kenneth R. French of Dartmouth have calculated the returns of both categories back to 1926. But their database shows no correlation in performance from one year to the next for either class. That means that, while growth stocks this year may very well continue to lead the market, whether they do so won't be determined by their 2009 performance.
There are good reasons for these findings, according to Lawrence G. Tint, chairman of Quantal International, a firm that conducts risk modeling for institutional investors. Mr. Tint said that if the market's return in one year were a predictor of its return the next year, "investors would rush in on Jan. 1 to buy or sell, depending on the direction of the anticipated basketball shoes movement."
"A few savvy investors would try to jump the gun by anticipating year-end results in December, others would try to beat them, and eventually the historic relationship would be destroyed," he said.
Though some investors might be frustrated that 2009's returns provide no insight into 2010's, Mr. Tint says the lack of a correlation is something to celebrate. If the market's return in a given year were related to how it fared the previous year, it "would be subject to unnecessary and unhealthy turmoil," he said.
"We can be comforted by the fact that reasonably efficient markets always base their level on anticipated future returns," he added, "and do not include history in the calculation."
One exception to this general pattern involves the relative performance of small-capitalization stocks, which over the last 80 years have shown some modest persistence from year to year. That makes sense, because small caps are the market's least efficient sector, and it therefore takes longer for their prices to adjust to new information.
Consider those years since 1926 when the 50 percent of stocks with the smallest market caps outperformed the rest of the market, according to a database maintained by the two professors. Over the subsequent 12 months, on average, those small caps fared 6.5 percentage points better than the top stocks for 2011 with the largest market caps.
After years when the small caps lagged behind the rest of the market, however, there was no difference, on average, in the two sectors' performance.
Small caps beat large caps generally — by an average of 3.6 percentage points a year, according to the professors. So the persistence of small caps' relative strength bodes particularly well for the sector in 2010, nike basketball shoes because the average small-cap stock handily outperformed the average large cap last year.
Note, however, that this weathervane points only to relative, not absolute, performance. Small caps could lose money in 2010 and still outperform their large-cap brethren.
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