Market Climbs the Wall of Worries

- 2010 1st Quarter

Earlier this week while I was leading an education meeting, I asked the group a simple true/false question. The question was "by a show of hands who thinks the market was good in 2009?" I was shocked that only one hand went up. While 2008 was the worst market year in most of our lifetimes, 2009 was a very good year. The S&P 500 Index was up 26.5% for 2009, making it the 2nd best year of the decade, and the 11th best out of the last 50 years.

We have ju st concluded the 1st quarter 2010, and we are hearing that investment sentiment is improving. It is the intent of this Market Commentary to tell you what has happened and why, and to give you some guidance on what we can expect in the months and quarters ahead. When this year began, many were concerned about the Market and the fragile economy and, therefore, predicted trouble in early 2010. That prediction appeared to be correct as the Market opened down. This led many to fear a repeat of 2008 performance. Thankfully, what transpired was the opposite (positive returns) and, as a result, the forecasts are looking brighter than they have in some time.

In the 1st quarter of 2010, several historic events took plac.:e. First, there was a devastating earthquake in Haiti. This was followed by the worst earthquake in Chile in over 80 years. Then, after much debate, The Healthcare Reform Act passed. While it will take some time for the details to unfold, it  is without question historic legislation.

Economists and analysts say the true cause of 2010's early success, and the sense of renewed optimism, comes from very  high corporate earnings. Many have called 2009 the year of the "Obama Stimulus Package" and praised the creative manner the Federal Reserve increased liquidity. In late 2009, the Fed began communicating a liquidity pull back forcing big business to stand on its own. Many were nervous about this and feared that the Market would fall as a result. Contrary to that fear, big business went into an expansion/growth mode  creating a strong Market surge. In fact, the S&P 500 was up 5.39% in the 1st quarter making it the best 1st quarter since 1998. In the 1-year following the Market bottom of March 9, 2008, the S&P 500 Index rose 68.6%. In addition to the surge of big business, other market concerns improved in the 1st quarter with the dollar getting stronger and little signs of inflation.

While we are all very pleased with the direction the Market has turned, the reality is that we still have more questions than we do answers. There are still some significant "headwinds" that need to be dealt with, and they will only get better with time. One of these areas of concern is unemployment. The creation of new jobs has been extremely slow and some believe unemployment will remain high for a prolonged period of time.  In addition to unemployment, the banks are still trying to recover.  Banks loaning activity decreased in 2009 and is expected to decrease 10-15% further in 2010.  With the banking system being the backbone of our economy, it is somewhat surprising that big business has been able to post such high earnings. The third major Market concern is the real estate market. While it seems that it cannot get any worse, home prices are still expected to drop even further.

So there it is, the good and the bad. What do we expect going forward?  We have moved from a recession to a period of economic recovery and we are now experiencing the market and economic cycles that occur following a recession. We need to keep in mind that the real recovery will be measured over years not in good months or quarters. A positive sign is that the Dow Jones just exceeded 11,000 for the 1st time since September of 2008.  This certainly is a milestone number but we need to remember that the market peeked at 14,200 in November of 2007, and fell below 7,000 in 2009 . So while we have come a long way, we still have a long way to go.

A main theme we have tried to convey is a sense of optimism and reason to be hopeful. While we are not entirely out of the woods, we can tum the page and start moving forward . As we have mentioned in previous market commentaries, this is a great time to review your accounts and make sure they are positioned correctly. Our education campaign for 2010 is "On the Mend". We would encourage each of you to make sure you are doing everything you can to recover as quickly as possible.

If there is anything that we can do to help you achieve your retirement or investment goals, please do not hesitate to contact us. We appreciate your continued support of and participation in Advise Me!® and look forward to working with you.

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