JonathanBurton

SAN FRANCISCO (MarketWatch) — Investors in mutual funds and exchange-traded funds mounted a spectacular ascent of the U.S. stock market’s proverbial Wall of Worry in 2013, hiking an essentially uninterrupted path to record heights and the best gains since 1997.

But as 2014 begins, concern is growing that the wall will tumble as investors look to stocks with complacency and say “What, me worry?”

Stock market ready for a downturn?

Paul Vigna and A&G Capital President Hilary Kramer discuss a possible economic downturn, along with sector and stocks investors should study and those they should avoid in 2014. Photo: Getty

Widespread optimism would be troubling for market returns going forward, but understandable, after diversified U.S. stock funds rose a stunning 34.2% in 2013 on average, including dividends, in a year that was anything but average. These funds’ ETF counterparts fared even better, up 34.8%, according to preliminary data from investment researcher Morningstar Inc.

The U.S. benchmark S&P 500-stock index SPX, -0.36% meanwhile, delivered a 32.4% total return for 2013. The 30 stocks in the Dow Jones Industrial Average, DJIA, -0.48% meanwhile, rose 26.5%, the blue-chip’s biggest advance since 1995 .

To put things in perspective, the S&P 500 in 2013 gained more than three times the stock market’s average annualized long-term total return. It was hard for an investor in the broad U.S. market to go wrong, as 457 stocks in the S&P 500 were up and only 41 lost ground, according to S&P. Bond-fund investors, meanwhile, suffered through the worst year for bonds since 1994.

Few market strategists foresee anything close to a repeat performance in 2014. but signs that corporate earnings are steadily improving suggests a decent year ahead for U.S. stocks and the funds and ETFs that own them.

“To the extent that interest rates and volatility is suppressed, market returns are going to be reasonably positive,” says Art Steinmetz, president of OppenheimerFunds.

“The big gains are behind us,” adds David Rosenberg, chief economist and strategist at money manager Gluskin Sheff + Associates. “But unless we have multiple contraction or get earnings decline, my sense is that earnings will be OK” He says U.S. stock investors can expect about a 7% total return in 2014, in line with Wall Street’s consensus.

MarketWatch Special Report: Investing in 2014 »