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Stock Market: A New Year Sparks Optimism

Stock Market News

January, 2010

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Stock Market: A New Year Sparks Optimism

We start 2010 with a much brighter situation than a year ago. The Standard and Poor's 500 Index climbed more than 24 percent in 2009 after taking a precipitous 37 percent decline in 2008. This reversal represents one of the biggest two-year swings in stock returns since 1974. The housing sector decline seems to have bottomed out, and many economists have pronounced the recession in the U.S. to be over. However, some noted that the celebrations were not universal as the job market continues to be in the doldrums, with younger and less educated job-seekers posting jobless rates significantly higher than the overall average. The banking industry seems to have failed to absorb the lessons of its recent behavior, earning taxpayers' fury as performance bonuses and pay at some Wall Street banks soared at yearÂ’s end. There is worry that Wall Street's powerful lobbying efforts will stymie government policymakers' attempts to rein in excesses, resulting in puny regulations incapable of preventing a similar crisis in the future.

The job market and the balance of power between Washington and Wall Street remain wild cards as we enter 2010. High unemployment - the nationÂ’s jobless total hit 10.2 percent in October - is still causing consumers to limit spending. Economists believe it wonÂ’t feel like a recovery until the jobless statistics improve. As the administration considers additional means to stimulate the economy and spur job creation, some analysts predict a rebound as soon as spring - others believe it might not be until late 2010 or 2011.

Stock market experts increasingly expect the overall health of the economy to influence the performance of the stock markets. This might seem like an obvious correlation, but it has not been a favored viewpoint of some investment professionals, who believe that a good stock would perform regardless of other circumstances. There are many historical precedents prior to the financial meltdown in 2008 to back this up, but we are now in unchartered territory with no real consensus on where the markets are headed. The economy might not follow predictable patterns, but it will be a factor in stock market performance. Here are some of the key issues:

  • Many individual investors waited too long and missed out on the rebound in stock prices. This happens following sharp market turns when investors fail to predict the upswing, missing the major gains that tend to occur early in the rally.
  • Experts caution individual investors against chasing performance. This urge might strike those who mistimed their re-entry into the markets in 2009, as investors have a tendency to look to the past to guide their current strategy. Analysts caution against interpreting recent events as the new norm, and suggest that if you wish to mine the past for insight go back a good 15 years or so.
  • Investment professionals note that those who stayed in the market during the 12-month period of volatility earned the gains. Again, patience pays off for savvy investors. Analysts suggest that investors now review their portfolio with counsel from their tax and financial professionals and rebalance to make sure their holdings still reflect their original strategy.
  • Some commentators are recommending stocks based on a no-frills economy. They suggest favoring blue-chip quality companies with cash, and others say look for companies with the ability to generate internal growth – rather than growth by acquisition.
  • Most commentators urge investors to think globally. Business spending is expected to be more consistent than consumer spending over the next year. With that in mind, some investment pros recommend considering energy, technology and materials companies with strong overseas markets.

We are not out of the woods yet, but the consensus is that recovery is under way. Just as the recession was atypical, we are told that the path to recovery will be equally hard to predict. No one knows where 2010 is headed, but the economy has turned a corner. We could see slow growth for the first half of the year, but analysts are anticipating modest market gains fueled by corporate earnings growth.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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