Looking back at 2009, history will show that it was a good year for market participants, helping them gain back some of the painful losses of 2008.
The U.S. and overseas equity markets posted strong gain and lower-quality stocks, which have historically been more volatile, performed very well for the year and both high-yield bonds and emerging markets reinforced this notion.
The story for fixed income investors was similar to that of equities, and most of the major bond indices posted strong gains in 2009.
The markets showed remarkable resilience in 2009, given the rocky start in the first quarter.
Equity markets sank in early 2009 and, on March 9, had fallen more than 25 percent for the year. It was at this time that Federal Reserve Chairman Ben Bernanke coined his now famous phrase “green shoots,” describing the climate of an emerging economic recovery.
A sharp rally ensued, and, despite cries from skeptics, equity markets pushed higher through much of 2009, ending the year on highs.
The case for a strong market in 2010
Economic data shows there is no doubt that the economy has rebounded from its lows. While it appears difficult to make the case for a strong economic recovery, we have seen the rate of decline in recent data slow and in many cases improve, at least somewhat.
Case in point: employment data indicates that the economy lost only 11,000 jobs in December — a sharp decrease from more than 650,000 monthly job losses in March.
Although economists suggest we need at least 100,000 new jobs just to maintain existing employment levels, the steady decline in job losses through the second half of 2009 was well received by the markets.
Consumer confidence is a similar story, showing modest gains in the latter half of the year.
Housing experienced a robust second half of 2009, as unit sales rose and existing inventories fell sharply. New home sales rose to 355,000 in November, from a low of 329,000 in January, while inventories fell to 7.9 months at the current sales rate.
This has been critical, given that housing and housing-related financing activities are at the heart of the current economic woes. Continued strength in the housing market will be an important component of an economic rebound moving forward.
A case for a weak market in 2010
The employment situation continues to be a concern, and a 10 percent unemployment rate is a challenge for the economy.
Although job losses have slowed substantially and nonfarm payroll employment was essentially unchanged in November, it will take a significant number of new jobs to replace the 7.82 million jobs lost since January 2008.
Economists project that it could take five years to see jobs return to more normalized levels. The loss in income across the economy in the aggregate will no doubt put a damper on future spending and economic growth.
Currently, 25 percent of U.S. homeowners have a mortgage that is upside-down, meaning they owe more than the house is worth. Furthermore, one out of seven mortgages is currently in arrears or in foreclosure.
So despite the fact that consumer confidence has moved off its lows toward the end of 2009, it is still at levels that do not bode well for renewed consumer optimism and increased spending in the near term.
Perhaps more of a mixed bag
The reality of the markets is that there is an ever-changing dynamic, and the likely scenario, quite frankly, is a mixed bag.
The key factors for 2010 will be to watch the government closely and to monitor its key policy decisions on interest rates and spending.
No doubt investors should continue to be cautious of risk, knowing that markets and market sentiment can indeed shift as the dynamic changes.
This article is presented by Kevin Dick, president of Kevin Dick Investment Management Group, 715 S. Beeline Highway, suite A. Dick can be reached at (928) 474-4350.