{click to open}

Conclusion

The U.S. stock market finished out the final quarter of 2010 with an impressive double-digit gain.  Encouraging GDP data, more Federal Reserve intervention, and the extension of tax cuts helped drive the rally.

Despite the stock market’s strong year, the U.S. economy still faces significant headwinds.  Millions of Americans are still out of work, and millions more are unemployed.  Unemployment benefits are just beginning to expire for the bulk of Americans who were laid off during the worst of the recession, which will probably cause even more stress to the economy if hiring doesn’t pick up.  Housing also remains fragile.  Last year brought a record number of foreclosures, and housing prices have continued to sink.  The stock market is signaling optimism, but there are still many challenges ahead.

Morningstar, Inc.

Contact us for your client copy of Ibbotson’s 3rd Quarter Investment Strategy Commentary.

{click to open}

Despite mixed economic data, the U.S. stock market witnessed a strong rally in the third quarter.  Thanks to an unusually strong September, the U.S. market is back into positive territory for the year.

After a weak second quarter, the market posted a strong rally in the third quarter.  The market set aside fears about the economic recovery, and embraced stocks.  Unemployment remains elevated, but strong cost containment has led to high operating margins and strong corporate profits that have pleased Wall Street.

Interest rates retreated again during the quarter, as the Federal Reserve reiterated its commitment to maintaining low rates, and investors continued to seek safety.  Companies have increasingly taken advantage of the environment to access cheap capital.

{click for printable copy}

The furious rally from the March 2009 lows finally took a breather in the second quarter.

Investors received welcome relief from the markets rally.  Many areas of the market that fared poorly in 2008 bounced back in 2009.  U.S. equities turned in two of their biggest quarterly returns in over a decade, while corporate bonds had one of their best years ever.  As investors moved up the risk curve, Treasuries suffered one of their worst years in the past two decades.  Also, sovereign creditworthiness remains in the spotlight, as Dubai struggles and Greece received a credit downgrade.  Commodity markets rebounded as well, as investors bet on an economic recovery.

email us at info@kaizenwm.com for a complete PDF copy.

We are excited to now offer Ibbotson’s Quarterly Market and Investment Strategy Commentary to our clients.  We already use them for analysis, asset allocation research and other services, and will now distribute their quarterly commentary to our clients.  

Ibbotson is a leading independent asset allocation provider with a mission to deliver innovative asset allocation solutions, helping investors reach their financial goals, and provide asset allocation solutions via cutting-edge academic research.  Ibbotson was founded in 1977 by Roger G. Ibbotson, Ph.D., and is now a Morningstar company.

Smaller was distinctively better in the quarter, as our small cap index added 24%.  Our mid cap index added 21% for the quarter, while the our large cap index was the laggard with gains of 16%.  Value and growth performed similarly in the quarter.

Still large growth leads all the other market capitilization indexes for the year, with a gain of 17%, belying the notion that the market’s surge has been a “junk rally.”  In fact, only a small portion of our US market index’s return is owed to firms with financial health scores in the bottom two categories out of five.  In addition, some consumer products stocks, such as PepsiCo, haven’t done much, while many other high-quality components of the growth indexes, such as Microsoft, Apple, Google, Qualcomm, and Schlumberger, are up over 20% for the year.

Despite the prospect of record bankruptcies, the fixed-income markets rose.  Our core bond index was up 1% for the quarter.  With the flight to quality imperative diminishing, last year’s gains in Treasuries have turned into losses, as our Treasury index dropped 3% for the quarter.  On the flip side, our corporate bond index gained 9%, which is one for the record books.

Commodities’ performance also revealed that stimulus efforts worldwide and infrastructure investments in China may be working.  Our commodity index rose 13.6% for the quarter.  The index is up 9% for the year.

Source: Morningstar, Standard & Poor’s, JP Morgan Asset Manaagement, iShares, and Morgan Stanley

On top of falling in each of the first three quarters of the year, the market, as represented by the S&P 500 Index, dropped a staggering 22% in the fourth quarter alone, bringing the total decline to 37% for the year.  Bonds were up generally in the quarter, while our commodity benchmark fell over 30% during the quarter.

A short recap of some year-end observations:

There was no place to hide for stocks.  All of the market-cap and style indexes were down – in the low to high 20% range in the fourth quarter alone.

Bonds diverge.  U.S. Treasuries posted positive returns for the year while corporate bonds gave us negative returns.  This hasn’t happened in over 25 years.

The commodity bear market continues.  Our benchmark commodity index ended up down over 33% for the year, primarily due to tumbling commodity prices during the second part of the year.

After an extraordinary and painful year, 2009 begins with the economy still sliding, credit markets under stress and asset prices at very low levels.  However, while the markets and the economy may face a long road back, we know from experience that the economy will, in time, regain its strength and that the markets will reflect this strength.  Logical and financial advice has never been more important, and we will continue to do what we can to help.