A warning from history for the markets in 2010

Just to make it clear, we’re generally very wary about most stock markets at the moment.

Yet were we in the bullish camp, we’d still have some cause for concern about how much higher the current market rally will go.

Why the worry? A history lesson. This Bloomberg chart shows the score in 11 previous bull markets since the 1930s…

The green bars spotlight the returns that America’s S&P 500 index – probably the best-used benchmark for US shares – has clocked up in the first year of a bull run. These averaged 48%, says HSBC research.

But the yellow bars show what happened next, i.e. in the second year of the rally. Or rather, what didn’t really happen next. Because the follow-up 12 months hasn’t proved anything like as exciting. On average, the S&P added just a further 10% in that time.

What’s more, a ‘correction’ of more than 10% occurred an average of 421 days after these big rallies started. The latest bull run began in early March 2008, so the history books are now warning us about a possible market fall in the spring. “After six or 12 months of a rally, momentum peters out, valuations look unappealing and investors start to worry about what could go wrong”, says HSBC’s Garry Evans. “Things are no longer straightforward”.

Clearly this applies first up to the US. But what happens on Wall Street tends to drive the rest of the world’s stock markets. So a pull back in American shares is likely to have a global knock-on effect.

All the more reason, then, to take a look at what MoneyWeek’s experts believe are the best places for your money in 2010. You can read their views in the latest edition of MoneyWeek magazine. If you are not already a subscriber, subscribe to MoneyWeek magazine.