Up, Up and Away


Throughout most of 2010, investors had no trouble finding reasons to fret about the future and remain on the sidelines:

  • Nouriel Roubini, the investment analyst who had predicted the Great Recession, predicted the “biggest co-ordinated asset bust ever” in 2010.
  • The January cover story in The Economist warned of asset price bubbles and asserted that US stocks were “nearly 50% overvalued.”
  • The “January Indicator” signaled poor stock market performance for the remainder of the year.
  • A tragic drilling rig explosion in April produced a disastrous and hugely expensive oil spill in the Gulf of Mexico.
  • A bewildering “flash crash” on May 6th saw the Dow Jones Industrial Average plummet over 1100 points, losing about 10% of its value, in the course of just a few frantic minutes.
  • Hundreds of bank failures revealed continued weakness in the financial system.
  • A divided Congress passed a complex and potentially expensive healthcare reform bill.
  • Uncertainty around tax rates in 2011 and beyond swirled incessantly until very late in the year.
  • Residential housing remained weak, with monthly sales of new homes falling at one point to the lowest level since tracking was initiated in 1963.
  • An obscure technical indicator dubbed the “Hindenburg Omen” generated a strong “sell” signal in August.
  • North Korea launched a deadly artillery barrage in November against South Korea’s Yeonpyeong Island.
  • A financial crisis with no clear solution gripped, and still grips, governments in Greece, Portugal, Ireland and Spain.

And yet despite these, and other ominous events, 2010 was another year of vindication — for the markets and for those investors who were willing to keep their heads down and stay invested when the ride turned rocky. Those investors have now been rewarded with two solid years of portfolio recovery, as the Wilshire 5000 Total Market index rose 11% in the 4th quarter of 2010 to put it up 17% for the year.

In fact, no matter where you look in the U.S. equity/asset markets, you see double-digit returns. The Wilshire U.S. Large-Cap index was up 11% for the last quarter of the year, and gained nearly 16% in 2010, and small cap stocks fared even better, with the Russell 2000 small cap index up nearly 27% for the year.

International stocks posted less robust gains, as questions swirled throughout the year about the soundness of European debt and the European banks that own it. The MSCI EAFE (Europe Australia and Far East) index of developed country stock markets rose 6% in the 4th quarter, pushing the international composite share prices into positive territory, with a total year gain of almost 5%.

Among the biggest laggards were, predictably, Greece (its Athex Composite Share Price Index fell 35% for the year), Spain (the IBEX 35 was down 17%), Italy (the FTSE MIB Index down 13%) and Portugal (the PSI 20 Index down 10%). Japanese stocks didn’t do much to boost the wealth of their investors; Japan’s TOPIX Index fell 1% in 2010, and Hong Kong’s Hang Seng Index (one of several proxies for Chinese stocks) was up just over 5% for the year.

Despite widespread publicity about housing and real estate woes, the Wilshire REIT index — which tracks real estate investment trusts that invest in commercial and residential property — gained nearly 8% in the 4th quarter and was up a surprising 28% for the year.

In commodities, the S&P GSCI index rose 13% in the fourth quarter, pushing the index into positive territory, a 9% return for 2010, which — despite the concerns of many about inflation — still lagged the overall stock market.

The numbers are not in yet on the economy’s overall growth in 2010, but what we can see so far suggests that a double-dip recession is less likely than it seemed at the middle of the year. The U.S. Government’s Bureau of Economic Analysis reported on December 22 that the U.S. Gross Domestic Product (GDP) rose at an annual rate of 2.6% in the third quarter of 2010, which means growth accelerated a bit from a 1.7% increase in the second quarter. Among the highlights: real exports of goods and services rose abut 7% in the third quarter, after a 9% increase in the second.

This is the time of year when you hear a lot of market predictions similar to those which predicted gloom and doom in 2009, and caution in 2010. It would be helpful if those who were offering market predictions wore wizard’s hats and carried a crystal ball. Famed economist John Kenneth Galbraith once opined that the reason stock forecasters existed was to make astrologers appear respectable. The lesson here is to be extremely cautious about pundits or anyone who claims to be able to predict the future and thereby outperform the markets.

That said, if you’re feeling adventurous, you can turn to the Rollins College web site (http://web.rollins.edu/~wseyfried/forecast.htm), where the predictions of professional forecasters, the Federal Reserve Board, economists selected by the Wall Street Journal, the Office of Management & the Budget, the Congressional Budget Office and the Wells Fargo organization are all laid out in a grid. They all expect economic growth for the next two years, gradually falling unemployment and low inflation.

Let’s hope they’re right for a change.

As always, please let me know if you have any questions or if there is anything I can do for you.