January 14, 2009Greetings!
Presented below are statistics for the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite Index.
Dow Jones S&P 500 Nasdaq
Index at 12/31/08 8,776.39 903.25 1,577.03
Index at 9/30/09 9,712.28 1,057.08 2,122.42
Index at 12/31/09 10,428.05 1,115.10 2,269.15
Full year % change 18.8% 23.5% 43.9%
Fourth qtr. % change 7.4% 5.5% 6.9%
The stock market's rally continued from the third quarter into the fourth quarter, slowing its pace slightly as the fourth quarter progressed but still closing well above March's record lows. The S&P 500 broad market showed a 5.5% gain from the third to 4th quarter and a full year gain of 23.5%. The Dow Jones Industrial Average shared similar gains up 7.4% in the fourth quarter and 18.8% for the year. The last days of December it lost some footing but January has begun on a positive uptick as of the time of this writing.
From the Dow's low point on March 9th, 2009, when it was down 53.8% from its all time high in October of 2007, it posted some of its biggest gains since the fourth quarter of 1998. The gains slowed some in December but still the Dow closed up 59.3% from its 12-year low in March. This was the Dow's fastest climb since 1933. On October 9, 2007 the Dow set its all time record high of 14,164.53. As of the Dow's close in 2009 it remains down 26.4% from this record high and down 9.3% from 10 years ago. That makes this the worst decade since the 1930s when the Dow dropped 39.5%. The bright side of this is that there remains much room for improvement and recovery.
Institutions led most of the return to equities during 2009. Individual investors remained skeptical and continued to move money from stocks to less riskier assets, such as bonds, throughout much of 2009. The so called "smart money" captured the March to December rally while most individual investors were still pulling out of their equity holdings and getting into the less risky bonds during the same period. Morningstar, Inc. reported that individual investors pulled $13 billon out of U.S. stock mutual funds and bought $239 billion in bond funds between March and November.
Inflation was at the forefront of many discussions among investors during 2009 and continues to be so going into 2010. Although there was much talk of inflation, there was hardly any of it in 2009 and it remained relatively flat. The Federal rate and housing markets are usually significant signposts as to the direction of inflation. During 2010 this will continue to be a hot topic and a scrutinized area as investors look to the Fed policy for clues. The infusion of the government's fiscal stimulus and deficit spending will begin to show their longer term effects this year not just as they relate to inflation but in the broad U.S. economy.
With interest rates at near-zero or zero, bonds enjoyed a very profitable year in 2009. Since bond yields move inversely to interest rates 2009 continued to be a banner year for bonds in the U.S. and abroad. Ten year U.S. Treasuries began the year at 2.22% due to investor's flight to quality after the stock market's enormous losses in 2008. As of December 14th Treasuries were yielding 3.55%. This was an indication that investors risk appetite had returned over 2009. They sought riskier bonds such as 10-year investment-grade bonds that started the year at 6.32%, dropping to 5.29% as of December 14th. The decline in yield on the investment-grade bond indicated that investors were demanding the higher yielding and more risky bonds. The narrowing of the yield spread between 10-year junk bond yields and 10-year Treasuries from 13.5% in January 2009 to 5.51% in December 2009 also indicated increased investor risk tolerance.
Global stock funds enjoyed being the frontrunner for 2009 over U.S stock funds with emerging markets posting the largest gains in the global class. Emerging markets are typically highly volatile and as their overall 72% gain in 2009 shows they can have big up swings. The Dodge and Cox International Stock Fund was up 48% for the year and was the top actively managed fund according to Lipper, Inc.
Overall 2009 was an unprecedented year in the financial markets. The government's stimulus infused $787 billion to shore up companies on the brink of failure. For the time being the tactics appear to have breathed life back into the economy. 2010 looks to bring continued recovery albeit at a slower pace. To that notion we will be keeping an eye on the Fed's interest rate policy which currently remains at all time lows. The Fed's pledge to keep rates low for an "extended period" combined with the recovery in the housing market will be strong indicators of overall revitalization of the U.S. economy.
Please call if you have any questions regarding your Quarterly Asset Monitoring Statement or if you wish to discuss your investment strategy.
Joseph M. Dowling, CPA
Sean M. Dowling, CFP
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