End Of Year Market Commentary
As we enter the last month of 2009, it is helpful to reflect on the year we have had and look cautiously into next year’s expectations.
As the economy paces through extraordinary times, it can sometimes seem that the market is simply a tide that moves all boats—and the unfortunate swimmers—in the same direction. The market has been in this mode from 2007 and 2008 as the markets and economy deteriorated; and, it has clearly continued through the market gains of 2009.
In 2008 it seemed that all investments—stocks, bonds, commodities and real estate—all fell together. The supposed diversification benefits had disappeared. From March 2009, it seems that any investment you could throw a dart at has gone up 50% or more. While this has clearly been the case for the past few years, the markets, in the long run, don’t behave this way—the market rewards some winners and punishes some losers.
As the market cycles through good times and bad, times of extreme economic and market stress are evidenced by traditional asset classes moving together in a single direction. Core market growth periods—which tend to dominate over longer time horizons—are evidenced by some assets doing markedly better than others. As the economic cycle goes—assuming government policy doesn’t get in the way—2010 should see a transition from the extreme market movement period, of the past three years, into a more “core growth” oriented period which hopefully will dominate the next few years.
As a continuation, the recent market moves have a biased view of fundamental economic announcements—when good news is announced, the market rallies; when bad new is announced, the market rallies. This is the inverse of the evidence of 2008.
In fact, just this morning, the ADP Employment Data report was much worse than expected and the market rallied 1%. Yesterday, on the heels of a very disappointing retail sales report, the market rallied 1.5%. As one analyst said, “It seems that flat to slightly disappointing is the new up for this market.”
This is an indication that there is more going on than simple traders paying attention to fundamental economic information. Over time, the market will begin to react appropriately to market and economic fundamental information. As the market begins to react appropriately in the next year, (i.e. rallies on good news and sell-offs on bad news) we expect that the market would be entering a normalized period which may persist through an extended recovery.
While I make it a practice to not give financial advice in a column such as this, as we head into the end of the year, it is a good time to visit with your financial advisor and reflect on your investment, tax and financial plan objectives.
Given that the market has improved significantly, it is a great time to balance risk versus return and to re-visit your stated investment objectives. In the past three years, the volatility has given all of us an opportunity to assess our own tolerance for risk. Although I don’t think the market will crash in 2010, the market is due for a healthy pause and a transition away from the extreme markets of the last three years. With where we have been and a better understanding of risk tolerance, this is a good time to make sure you are accomplishing your goals.
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