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Q4 2009 Market Commentary
Market Summary
December 31, 2009
Equities
The stock market staged an amazing recovery in 2009, coming back from the brink of disaster, thanks to unprecedented rescue efforts by governments around the world. After plummeting 26% to a 12-year low in March, the S&P 500 rebounded vigorously to finish the year up over 26%. This run marks the fastest rise for the index since 1933. In the year, growth-oriented stocks outperformed value stocks and shares of large companies ended the year broadly in line with those of small companies.
|
|
Q1 |
Q2 |
Q3 |
Q4 |
YTD |
|
S&P 500 |
-11.01% |
15.93% |
15.61% |
6.04% |
26.46% |
|
Dow Jones |
-12.48% |
11.96% |
15.82% |
8.10% |
22.68% |
|
NASDAQ |
-3.07% |
20.05% |
15.66% |
6.91% |
43.89% |
|
Russell 1000 Value |
-16.77% |
16.70% |
18.24% |
4.22% |
19.69% |
|
Russell 1000 Growth |
-4.12% |
16.32% |
13.97% |
7.94% |
37.21% |
|
Russell 2000 Value |
-19.64% |
18.00% |
22.70% |
3.63% |
20.58% |
|
Russell 2000 Growth |
-9.74% |
23.38% |
15.95% |
4.14% |
34.47% |
|
MSCI EAFE |
-13.94% |
25.43% |
19.47% |
2.18% |
31.78% |
Following are some highlights from 2009:
The Dollar – After powering through the financial crisis, the U.S. dollar stalled in 2009 as investors rediscovered their appetite for risk and refocused on the currency’s flaws. The surplus of cheap money pumped into the economy by the Federal Reserve, aimed at spurring economic activity, encouraged investors to borrow dollars and use them to buy everything from other currencies to stocks to gold to commodities. This maneuver, known as a “carry trade,” tends to depress the borrowed currency, and is the likely culprit for the dollars weakness last year.
For much of the year, the stock market appeared fixed on a single relationship: the dollar vs. everything else. When the dollar weakened, stocks, oil, and gold rose, and vice-versa. The inverse link between the dollar’s path and the movement of the S&P 500 reached a historical extreme in early December. The correlation between the two was the most negative in more than 30 years, according to a report from Deutsche Bank.
Gold – Although base metals outperformed precious metals in the year, precious metals stole the limelight. Gold was up 24% for the year to $1,095/ounce. It set 27 records in the year amid waves of buying from institutional and individual investors seeking protection against inflation and a falling dollar. Among the buyers of the glittery metal were central banks. After decades of selling, central banks were net buyers of gold in the year. Central banks in
Oil – The price of oil in 2009 essentially tracked concerns about the economy. As hopes for an economic recovery took hold, oil prices bounced back sharply. Oil closed the year at $79.36/barrel, up $34.76, or 78%, but still well below its all time high above $148/barrel in the summer of 2008.
Unemployment – The Nation’s unemployment rate peaked at 10.2% in 2009, the highest since 1983, as employers did anything they could to cut costs. Although the pace of job losses slowed towards the end of the year, the economy continued to shed jobs. The unemployment rate is usually the last indicator to turn around and markets typically forecast its retreat far ahead of time.
Fixed Income
Unprecedented actions by the
We continue to recommend shortened durations for fixed income instruments due to the inflationary implications of the enormous amount of debt issued by the Treasury and the Fed’s purchase of Treasuries. We will continue to monitor inflation and adjust our recommendations accordingly.
What to expect in 2010
The global recession appears to have ended last year, although the official timing will not be declared for many months. Thus far, the evidence supports our view that the recovery will be subdued by historical standards as there are remaining structural issues in the economy and the financial system. However, it is important to not let these concerns dominate one’s investment strategy, as cyclical forces can overwhelm structural trends, and markets often rise in the face of serious long-term economic and/or financial imbalances. That was very much the story for 2009 and likely will continue to be the case for 2010.
We expect gains in the coming year to be very modest relative to those of 2009, and market volatility will likely be higher. We advocate target allocations to equities in the new year and advise against an overly aggressive or defensive investment stance. The key forces that have driven asset prices higher last year are still in place, and are likely to remain so for a while.
More than anything, recent market gains have been a reminder of the power of cheap money. With short term interest rates averaging next to nothing in recent months, it has been very painful for investors to stay in cash or government bonds. Our expectation is that major central banks are not likely to abandon their current low interest rate policy anytime soon as the economic environment is still fragile and inflation is well contained. There remains a large amount of money on the sidelines, earning virtually nothing. The equity markets should continue to climb higher until such time as the central banks indicate a willingness to tighten monetary policy. This leads us to believe that the buying power for equities has not been exhausted and they should rise, albeit moderately, over the coarse of the next year.
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