NEW YORK (CNN/Money) - When it comes to the economy, there hasn't been much to complain about in the past year. Real gross domestic product has grown more than 4 percent over the past four quarters.

Although some economists fear a slowdown next year, most expect above-average growth to continue. The Administration is looking for 3.5 percent growth in 2005, while some forecasters project as much as 4.5 percent.

Inflation, which averaged only 2.4 percent at an annual rate in the first half of the year, has crept above 3 percent but is still moderate.

Job creation hasn't been as fast as some had hoped, but the unemployment rate has dropped significantly from 6.3 percent in the middle of 2003 to a recent 5.4 percent.

All in all, it's an economy that should be quite positive for stocks. And yet the broad market has been flat for most of 2004. What's the reason for the recent stagnation, and what lessons can investors learn from it?

Lesson No. 1: Psychology matters. Over the long term, share prices follow earnings. But for a year or two, investor psychology can overwhelm fundamentals.

Fear of terrorism, concerns about Iraq, a divisive election and an excessive budget deficit all combined to keep a lid on stock prices for most of 2004, despite superior growth, falling unemployment and stable inflation trends.

Lesson No. 2: Oil follows its own cycle. The oil price reflects demand, Middle East politics, inflation and the value of the dollar. But mostly, it is determined by the availability of additional supply. That extra supply, in turn, depends on expansion projects begun several years earlier.

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After a period of expensive oil that encourages rapid expansion, excess supply can cause oil prices to drop too much. Similarly, a period of cheap oil can discourage expansion, laying the groundwork for a spike in oil prices.

In 2004, the price overshot on the upside. The next likely move is a period of relatively low prices -- perhaps even below $35 a barrel.

Lesson No. 3: The U.S. is becoming more vulnerable to external shocks. The oil price isn't the only global trend that affects the U.S. stock market. So do global interest rates, the value of the U.S. dollar and labor costs in other countries.

We may be able to act unilaterally when it comes to military affairs. But as long as this country is running a big federal budget deficit, the U.S. economy will be highly sensitive to economic trends overseas.

Lesson No. 4: Stock market excesses take a long time to correct. The most popular big-cap growth stocks traded at price/earnings ratios as high as 75 in 2000. Once the recession began, they started to deflate. But it took until 2004 for the group to finally fall to a cheap 21 P/E, below their historical average of 25.

Lesson No. 5: There's no such thing as a safe stock. Shares of companies that were supposed to have nearly bulletproof earnings -- such as Pfizer and AIG -- stumbled in 2004. And stocks that were supposed to be clear bargains -- such as Washington Mutual and Alcoa -- proved that they could indeed go lower.

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If there's one takeaway from these lessons, it's this: Even if you can predict the economy correctly, there's no automatic connection with the stock market -- at least in the short run. Moreover, external shocks are becoming more threatening and less predictable.

Your only true defense -- and fortunately it's a good one -- is to diversify as broadly as possible and invest with a time horizon of at least four years.

Moreover, you shouldn't neglect sectors and industries that are out of favor.

If you wait until a trend appears to be starting, share prices will all be up. That's the problem for investors today who decide they want inflation protection and then discover that oil stocks, real estate investment trusts and gold-mining stocks all look expensive.

Your real protection and best bargains come from buying stocks before their sectors start to look timely. Given the unpredictability of the market, those may be the very stocks that lead the advance a couple of years from now.

Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.