Stunnin Comeback Year Punctuates Volatile Decade

The good news overshadowed the bad as the financial markets closed out 2009. Final numbers showed notable gains over comparable numbers in 2008, to say nothing of the remarkable comeback from March 2009 lows. Yet, long-term investors couldn’t miss the disturbing fact that there was no net progress during the past decade – none of the indices came close to matching their numbers posted at the end of 1999. Yet, most analysts are looking for last year’s progress to continue into 2010, as figures indicate some thawing in the frozen job market and housing prices showed a slight rise. Even year-end consumer confidence numbers edged up more than economists had been expecting.

For the record, the Dow Jones Industrial Average (an unmanaged index of 30 widely held stocks) registered an excellent final quarter, finishing at 10,428.05, up 7.4% from its third-quarter close and 18.8% above its closing 2008 numbers. The NASDAQ Composite (an unmanaged index of all common stocks listed on the NASDAQ National Stock Market) rose to 2,269.15, for a gain of 6.9% for the quarter and 43.9% over its 2008 close. The S&P 500 (an unmanaged index of 500 widely held stocks) finished 2009 at 1,115.85, up 5.5% for the quarter and 23.5% above its 2008 close.

As good as they seem to be in the current context, these indices fell short of their 1999 postings, with the Dow finishing 2009 down 9.3%, the technology-heavy NASDAQ Composite down 44.2% and the S&P off 24.1% over the last decade. It wasn’t glum news for all investors, however. Studies showed well-diversified portfolios posted substantial gains over the past 10 years, as under-valued mid- and small-cap stocks and emerging markets posted impressive results.

During the year, investors watched the U.S. dollar, still a global bellwether currency, sink nearly 3% when measured against the euro. Crude oil prices, once hovering in the $50 range, edged up to $80 a barrel as 2009 ended. Financial markets everywhere, while less volatile than they were a year ago, remain sensitive to good or bad news. They rise on favorable employment or housing price indicators, but are quick to plunge when uncertainty arises – consider the temporary jolt Dubai World’s announced debt crisis gave the markets at the end of November.

Resistance to unfavorable news, it seems, is built into evolving market psychology. News of bank closings – the FDIC closed 140 of them in 2009, compared to 25 in 2008 – seems routine and unremarkable. Investors apparently accept the general views of economists who expect only modest growth over the next year. Consumers drive 70% of the U.S. economy, and under current circumstances, it’s difficult to get them in a spending mode. Greater growth is expected from emerging markets such as China and India, with their growing middle classes.

As we turned to a new calendar, even the wariest investors seem to have come back to the markets, accepting that the recession is probably over and that the U.S. and global economies are in recovery mode. If this situation holds, you may wish to examine your portfolio to ensure its assets are appropriately allocated and well-diversified as we work our way into 2010. To review your portfolio, please feel free to contact us.

Investing involves risk, and investors may incur a profit or a loss. Past performance is not an indication of future results. Investors cannot invest directly in an index. Investing in commodities and precious metals is generally considered speculative because of the significant potential for investment loss. They are volatile investments and there may be sharp price fluctuations even during periods when prices overall are rising. When appropriate, they should only form a small part of a diversified portfolio.