Many investors worry that the current bull market, which started in March 2003, is quite long-in-tooth.
For those who are concerned about the immediate future, history provides an interesting and reassuring view for the rest of 2007.
In the last four decades, since 1967, there were 20 different years when the UK stock market rose in the first five months by up to 15.5%. It is not common knowledge but shares continued to rise in the rest of the year in 19 of those occasions. The stock market did not rise straight up each time of course. There were occasional short term dips. Some of them were quite steep. But over the course of the full seven months from June to December, prices virtually always rose.
The single exception was in 1981, an interesting exception to the rule.
In case your history is a little rusty, recall there was a sudden sharp share price decline in August and September of that year in response to fears about rising interest rates in the US.
UK shares fell 22% in just over one month. Despite this big fall, the total drop for the full seven months was just -0.78% as the stock market clawed back most of its late-summer losses in the final three months of the year. If ever an exception that proved the rule, 1981 was it.
There were two other years that also featured steep summer-time drops. Shares fell by around 10 per cent toward the end of the summer of 1972. Although no one knew it at the time, it turned out to the start of our worst-ever bear market. Prices fell by 74 per cent in the next two years. Even so, June to December of that year managed to turn in a profit of 0.4 per cent, despite the summer stumble.
The summer of 1992 featured another steep 15 per cent decline as the effects of an over-valued pound hurt the UK economy. But our September ejection from the Exchange Rate Mechanism triggered an enormous rally. By year-end, the UK stock market managed to turn a profit for the seven-month June to December period.
If the past is any guide, price gains no greater than 15 per cent in the first five months of the year often are associated with further profits for the rest of the year. The same is not true for losses or bigger gains in the first five months. There were 20 years since 1967 when the UK stock market either fell (by any amount) in the first five months, or rose by 16% or more. The record in the next seven months was just eight gains versus 12 losses.
As far 2007 is concerned, the FTSE-100 rose by six per cent in the first five months of the year. No guarantees of course but history teaches that this is often a good sign for the rest of the year.