How have stocks done over the last year? Here’s a picture of the S&P 500 stock index. Click to enlarge the picture. 
Two things are quickly apparent:
1) Stocks have not made much progress in the last year. The 1 year return is 3.6% of which 1.6% is from price appreciation and 2% from dividends. That’s against the average annual total return since 1926 of 10.8%/year
2) It’s better than it was last fall as it made higher highs until late April, had a move down and since May has been making a shorter run of higher highs and higher lows but still not up to the level of April.
Note too that we are at a low point on this latest short-term upward trend.This is a critical juncture – either stocks break down here due to bad news from Europe and our own rather poor economic news or stocks continue to chop higher and stay in the recent upward trend.
Here’s the long term view. I have used a logarithmic chart which removes the effect of compounding and gives a clearer picture of year by year growth.
What is apparent on this chart is that:
1) US stocks have stalled out for 12 years with prices actually lower than in 2000
2) Volatility has greatly increased over prior decades
3) A trend line drawn through the years 1955 through 1995 which would exclude the bubble years of the late 1990s arrives at roughly the point prices are at today
A more skeptical analysis might suggest that after a long climb upwards that accelerated to a peak in 2000 the market has spent 12 years tottering at the top and will fall. An appeal could be made to economic fundamentals such as that we are at the end of 60 years of increasing consumer indebtedness and governments are now in debt trouble themselves after so many years of governments expanding much more rapidly than their economies.
Individual investors have reacted to the lack of progress and dramatic increase in volatlity and are greatly concerened about the pessimistic analysis. So, since 2008 they have steadily pulled money out of stock funds. Are they right? Well, individual investors as a group usually have their timing completely backwards and the most successful strategy as been to do the opposite.
Whether that holds true again depends largely on whether European problems prove too large to keep the common currency union together. Failure to do that would in the short run be very bad for the European economy. I am not so sure it would be bad in the long run as long as they keep trade barriers low.
As Europe goes, so goes Asia and the US (Africa and South America and Antarctica are not big contributers to world stock price movements). As Europe goes, so goes the largest source of demand for Asian products. Asia and Europe together are the largest buyers of US exports. I don’t see a clear resolution of this issue in the next few months. So, our stock allocations are at about the long-term norm until we get better clarity.