Where will stock markets end the year?

Where will stock markets end 2010? There aren’t many consensus views around these days, but the answer to this question appears to offer a pretty clear one.

Most commentators expect the market to rise but not as much as it did last year – they expect what they like to call “consolidation.”  But how likely is this?

There is a general consensus that long-term equity market returns are around an inflation-adjusted 7% a year (which may or may not be true). There is, therefore, an expectation that markets will see single-digit positive returns more often than not. The problem is that they don’t.

The truth is that years that produce returns of between 0% and 10% practically never happen. There have been only 19 of those years in the US since 1900: over 80% of the time the stock market either lost investors money or made them much more than 10%. Markets much prefer to melt up and melt down than to provide steady returns.

Think about that and then add in all the wild cards that could kick the global economy this year (a double dip recession, a collapsing Chinese asset bubble, a sovereign default, another stage in the banking crisis, Greece dumping the euro… that kind of thing) and it is really hard to see how any markets might have a boringly flat sort of year.

Instead, we should probably expect markets to move dramatically. It is always possible the drama could come from another move up. But given the state of the global economy and the fact that most markets have already regained 50% of their losses, it’s much easier to think it will be down.