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I think that the year 2010 will be remembered not only for the financial performance of the markets but also for all of the regulatory issues which seemed to be in the news daily. Who can forget the humbling appearances of Goldman Sachs executives before a panel of angry and posturing Senators? The word "bailout" seems more closely aligned with rewarding incompetence and corruption as to simply helping a nation survive. Dodd and Frank will go down in history as sponsors of a 2,300-page bill that "requires 243 rule makings and 67 studies." I wonder if we will ever know how many of the elected representatives actually read the behemoth before casting their votes.
Since everyone asks how the market did, let's begin with the S&P 500 Total Return, an index of 500 companies that are reflective of the US economy and an index that includes the impact of dividends.
January was negative followed by a recovery in February and at the end of Q1 we were plus 5.36 percent. That marked a turning point and at the end of June we were down 6.65 percent. Before everyone jumped off the bridges the summer rally took hold and we were up just under 4 percent at the end of September. As of 11/30 we are up 7.85 percent and either rallying, declining or on hold. You can see that there swings of more than 10 percent in the index, down in the Spring and upward in the Summer/Autumn and yet we need to ask what changed and should we even follow a benchmark?
That cannot be answered in 6,000 words let alone 600, but it is safe to say that at times the index was reflective of some very short term trends, possibly large trades and an interpretation of government policy. Some pundits feel that the rally in Q3 was brought about by the belief that there would be a shift in political powers in DC and that was borne out in the November election. If you subscribe to that theory then we need to wait and see if a swing back to fiscally conservative policy can occur and will it stimulate growth.
Interest rates were for the most part steady and down. Bond holders were rewarded again by coupon yield and price appreciation. The Federal Funds rate was 00-25 basis points and the 10-year Treasury saw its yield decline from about 3.5 to 3 percent. The low of 2.5 was seen sometime in August /September on the expectations of the famous Quantitative Easing program of the Fed where they are buyers of longer Treasury debt in order to stimulate the economy. Corporate bonds exhibited similar movements, which is an encouraging sign.
It is more important to look past the numbers and examine some of the low points that occurred. On May 6, 2010 we witnessed the infamous "flash crash" a time period which saw the DJIA fall over 950 points and then rebound to close down just 300! The reasons for the crash were not really known and that unnerved investors as much as the loss in market value, which may have been temporary. The average investor needs to believe with all their heart that the equity markets are fair. They don't have to be calm, always rational or even positive but they must be fair, with regulations that will not allow unfair manipulation.
One result of the market action that day was to shake the public's faith in a system that needs popular support.
The U.S. has had a stubbornly high unemployment rate for the year which started the year at 10 percent and the latest number is 9.8 percent after a brief dip to 9.5 percent for June and July. With the large number of Americans out of work it is a huge relief that the US economy has grown and that corporate profits have been good. Employment is not expected to improve dramatically in 2011 and that could prove to be a damper on returns although we can see that the two do not always move in step.
The Dodd Frank Act will attempt to change the way that financial companies interact with the public and due to the complexity of the legislation and the fact that so much of it has yet to be formulated we cannot really state if it is a success or not. However its passage was a major event of the year.
To recap, 2010 presented equity investors with average returns and fixed income investors benefited from the weak economy and low interest rates. However, the more important issues that people need to focus on are the legislative and political events coupled with an examination of the way that the regulators handled disruption to the markets.