Could the Market Jump 34% This Year?

Wall Street is aglow with rosy predictions of  how the S&P 500 may fare in the coming year. Too bad no one's ever consistently -- and correctly -- predicted how the market will move.

A recent roundup of forecasts for the S&P 500's performance in 2009 yields an average expectation of a 16% gain for the index, to 1,050. That's roughly 34% higher than where the market closed Thursday. Among 11 strategists from major banking institutions, only one expected a drop this year -- and a small one, at that.

Compare those sunny expectations to these historical returns for the S&P 500:

Few could have expected the market to rise in 1997, atop several years of explosive growth. Another gain of more than 20% in 1998 would seem even more improbable, as would yet another leap in 1999. After two years of drops in 2000 and 2001, many investors were surprised by the market's even steeper 22% plunge in 2002. Sure, the stock market may average a 10% gain over the long haul, but we clearly can't expect that average in any given year.

The perils of punditry
On The Daily Show recently, host Jon Stewart poked fun at the wildly out-of-whack predictions made by commentators on financial network CNBC. Jim Cramer notably predicted in late October 2007 that the Dow, then approaching 14,000, would just keep rising. It recently fell to less than half that level. In November 2008, with the Dow at 9,600, a panelist on CNBC's Fast Money suggested that "fundamentals are coming back," predicting that investors would regain confidence. Today, the Dow's some 2,000 points lower.

Even John Bogle, the index fund pioneer, has warned against trusting experts' market calls. It's critical to remember that no one knows how the market will perform in the coming days, months, or even years. Some will guess correctly, but one right call today doesn't guarantee similar success tomorrow. If anyone were really that good at timing the market, they'd have quickly shot to the top of the lists of the world's richest people. Instead, the folks you see on those lists have generally reached their respective pinnacles through years of hard work building companies or diligently investing.

Stocks, too
You'd think that forecasting an individual stock would be easier and more reliable than gauging the course of the entire market. Alas, that's not the case. And short-term predictions are just silly in the first place. A stock may be a great bargain at its current price, but that doesn't mean it won't still take several years to advance to its intrinsic value.

In late 2006, stock picker Jim Jubak suggested five stocks for 2007 -- a year in which the S&P ultimately advanced around 5%:

Source: MSN, Yahoo! Finance.

The table reflects how seemingly arbitrary one-year returns can be. Four of the companies retain healthy long-term prospects. But even though AIG has imploded over the past year, falling 97%, the biggest plunge from 2007 belongs instead to Amgen, which followed that drop with a 24% gain in 2008.

Seeking companies that will perform well in the short term is little better than speculation. Even an expert like Jim Cramer can be wildly hit-or-miss with such predictions. Check out his speculative picks for 2007:

Source: CNBC, Yahoo! Finance.

Put away that crystal ball
If you can't put your faith in predictions, what can you trust? Step back and look at the market over the long haul. Even great stocks can be stagnant for years at a time, but in the grand scheme of things, the market's always headed upward. While you're waiting for that upswing, keep your patience, and avoid the temptation to speculate -- especially based solely on someone else's snap judgment. Roll up your sleeves, do your due diligence, and you'll find any number of superb stock bargains. From a long-term point of view, our current market malaise could be a rare, great opportunity.