2010 Market is a Rollercoaster Ride

We have closed the door on another year and the market turned in a respectable 12.8% gain for 2010 as measured by the S&P 500 index. It was a rollercoaster ride with three rallies and three downturns. The volatility gave investors whiplash and made it very difficult to navigate. By August, even veteran investors acknowledged that 2010 was one of the most difficult markets they had worked with in years. Finally, in September, the market began a sustained rally that continues to the present.

The dollar continues in a negative trend and the falling dollar is inflationary. Fixed income does not do well in an inflationary environment. Bonds increased in value as interest rates dropped and investors fled to the safety of U. S. Treasuries this past summer. This created a bubble in bonds as money poured in from American as well as foreign investors. The bond market peaked in November and values are trending down as yields move up. The likely scenario is that the price of bonds will fall and rates will rise in the coming year. It is time to be cautious about exposure to the bond market, and especially bond funds.

 

On the domestic equity front, mid cap and small cap stocks outperformed the large cap. Among international stocks, the emerging economies continued to outperform the developed, a trend that has been in place for a long time. Commodities had a good year with basic materials, agriculture, and metals and mining doing very well.

 

There is an old adage that says “As the first 5 days of January go, so goes January. And, as January goes, so goes the Year.” The S&P 500 is up 1.1% for the first 5 trading days of 2011. The next step will be to see how the entire month goes. Historically, there are always exceptions to these old adages, but they do have some basis in fact to live on as they do.

Only time will tell how the market behaves in 2011, but at this writing the outlook is positive. We know that we cannot rely on old adages. We must be diligent every day to follow our discipline and the irrefutable law of supply and demand.

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