The market rally that has raised share prices by more than 70% had its first birthday this month, and it still seems to be roaring along. Should we be celebrating? There is certainly a strong bullish case to be made. In nine of the last 10 market recoveries going back to 1932, stocks gained ground in the second year after a bear market, according to research by Merrill Lynch.And the patterns of longer-term market performance also offer some reassurance. Bad decades are often followed by good ones, and we?ve just been through a very rough 10 years.

Even after last year?s run-up, equity prices have fallen over the last decade. In fact, when the long bull market of the 1990s peaked a decade ago, on March 24, 2000, before crashing to an end, the S&P 500 index stood at 1,527. Today, the benchmark index is 24% lower, at 1,159. And as rare as it is for stocks to post losses for a 10-year stretch, it?s even rarer for them to have two consecutive decades of losses. That last happened in the wake of the market crash of 1929. Eventually, stocks can be expected to revert to their long-term average performance?and that bodes well for this rally. But strategists warn investors not to get their hopes up too high, or to assume that the market will continue to perform as it has recently.

For starters, if the rally continues through 2010, the year ?is unlikely to be anywhere near as rewarding as the past one?, warns Jeffrey N Kleintop, chief market strategist at LPL Financial. That?s partly because second years of rallies are almost always less fruitful than the first. Only twice has the S&P 500 index gained more than 12% in the second year after a market bottom. And the average gain was just 9%, according to Michael Hartnett, Merrill?s chief global equity strategist.

History shows that Year 2 has been particularly challenging after bear markets related to recessions, Kleintop said. In the second year after the most recent bears in this category?which spanned from 1980-82 and 2000-02?stocks gained only 2% and 8%, respectively. But won?t this rally gain support as stocks bounce back from a lousy 10 years? Maybe. But there?s no guarantee that this will be the year stocks emerge from the decade-long slump. And even if stocks begin to ?revert to the mean?, it doesn?t mean the market will necessarily post average or above-average gains in the subsequent decade.

Last year, Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School studied stock markets going back to 1910. They found that stocks? relative performance versus Treasury bills was nearly the same after the worst and the best years in the market.

More often than not, it?s fundamentals like valuations?not past performance?that dictate stocks? long-term performance. And, historically, there is evidence the current market is not undervalued. For example, using 10-year average corporate profits, Robert J Shiller, the Yale economist, calculates that the market?s price-to-earnings ratio is 20.6. That?s noticeably higher than the historical average of 16.

In periods when the market?s P/E ratio has been between 19 and 25, the average real return for stocks over the subsequent decade has been 3.8% after inflation, according to the Shiller research.

Assuming that inflation is around 3%, stocks are likely to return less than 7%, which is lower than their long-term historical gain of around 10% a year.

?Going into this next decade, we start with the US overpriced, so do not be conned into believing that every bad decade is followed by a good one,? wrote Jeremy Grantham, chief investment strategist of GMO, the asset manager based in Boston, in a recent shareholder letter.

Robert Arnott, chairman of Research Affiliates, the asset management firm in Newport Beach, California, said, ?When you combine moderately above-average stock prices with a vulnerable economic outlook, it?s hard to justify above-average P/E.? He added, ?That leaves me with a cautious outlook.? What does this mean for investors? ?It?s time to ratchet down your expectations,? he said. ?If you can manage 5% returns after inflation, that?ll be a home run in this market.?