Q4 2010 Economic and Market Review
Economic Review – Fourth Quarter 2010
Worries about a double dip faded as equities posted substantial gains during 2010. Even taking into account the 16% correction between April and July, the S&P 500 Index gained 15.06% across the year. Within US equities, small caps were the clear leader. Among other asset classes, commodities were stellar performers. In contrast, returns for the MSCI EAFE Index of international developed market equities were more muted at 8.21%. Weak returns for Brazil and China pulled down the very strong results of the other emerging markets. Improved economic health and continuing stimulus together dampened bond market returns especially in the final quarter of the year. Nevertheless, the bond markets generally produced positive full-year results due to rates falling in the middle of the year.(1) These solid results were achieved in an environment marked by a renewed focus on macro fundamentals and a return to more normal volatility. As asset classes began performing more in line with their long-term averages, US stock market volatility declined 13% by year end from its second quarter peak.
Positive Surprises:
While concerns remain about the European debt crisis as well as the slow pace of recovery in US employment and housing, the recovery was not derailed by these concerns, and indeed many positive surprises combined to produce the general uptrend during 2010. US corporate profits were the biggest winner in 2010, reaching their pre-recession peak by mid-year. Corporate cash positions totaling nearly $2 trillion reached their highest level relative to total assets in 50 years. Aiding the global recovery, the second phase of quantitative easing started in November and may add as much as $600 billion to the nearly $1.7 trillion in government asset purchases that were made during the first phase of easing.(2)
Contrasts and Contradictions:
However, many of 2010’s positive surprises can be contrasted with persisting economic and market trouble spots. In Europe, recession and high unemployment plagued countries such as Ireland and Greece, while Germany experienced the lowest unemployment in two decades and strong export growth. Commodity markets rallied while US core inflation rates touched 50-year lows. US unemployment remained stuck at very high levels, but consumer spending picked up. The residential housing market in the US continued to struggle, yet companies engaged in healthy capital spending. And of course developing China and India continued to grow much faster than the developed economies.(3)
Looking Ahead:
Perhaps the biggest surprise of all was that investors did not rush back into stocks. Investors actually pulled a net $64 billion out of US stock mutual funds in 2010 through October.(4) It is unclear whether investors will pile back into stocks in 2011. Fixed income funds also experienced outflows late in 2010, led by redemptions in municipal bonds.
Positive surprises in 2011 could include accelerating employment and GDP growth as well as possible continued gains in the stock market. Quantitative easing is scheduled to end in mid-2011, leaving questions as to whether another economic relapse will follow or whether the economy will be strong enough to move ahead without government support. As well, interest rate increases in China and debt downgrades in Europe are areas to watch.(5)
As always, I’m here to oversee your portfolio and always available to discuss any changes to your goals or objectives, please call or email if you ever need anything.
Robert O’Braitis
President
Chief Financial Strategist
Lansdowne Private Wealth Management
703-724-9499
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(1)All returns are sourced from Morningstar
(2)Ned Davis, “Some Potential Macro Surprises,” Institutional Hotline, December 31, 2010 and Dirk Hofschire, “The top 10 surprises of 2010 in the financial markets,” Fidelity.com, December 22, 2010, https://guidance.fidelity.com/viewpoints/top-ten-surprises.
(3)See footnote 1.
(4)Dirk Hofschire, “The top 10 surprises of 2010 in the financial markets.” See footnote 1.
(5)Ned Davis, “Some Potential Macro Surprises,” Institutional Hotline, December 31, 2010 and Bob Doll, “2011: A Look Ahead,” December 31, 2010, http://www2.blackrock.com/US/individual-investors/market-insight/investment-commentary/bob-doll-weekly-commentary.
This information has been obtained from an outside source and is provided by Robert O'Braitis. Robert O'Braitis, AXA Advisors and AXA Network do not guarantee or accept liability for its accuracy. This information should not be constructed as investment advice. All economic and performance data is historical and is not indicative of future results. Diversification strategies do not guarantee a profit or protection against loss in a declining market.
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