Up, Up and Away...

2010 was another year of vindication--for the markets and for those investors and financial planners who were willing to put their heads down and stay invested when the ride turned bumpy.  Buy-and-hold stay-the-course investors have now been rewarded with two solid years of portfolio recovery, as the Wilshire 5000 (total market) index rose 11.59% in the 4th quarter of 2010 to put it up 17.16% for the year.  The Russell 3000 (total market) index posted similar gains: up 11.59% in the fourth quarter and up 16.93% for all of 2010.

In fact, no matter what sector you look at in the U.S. market, you see double-digit returns.  The Wilshire U.S. Large-Cap index was up 11.01% for the last quarter of the year, and gained 15.83% in 2010.  The Russell 1000 index, which also tracks large cap issues, gained 11.19% in the 4th quarter to finish up 16.10% for the year.  The Standard & Poors 500 rose 10.76% for the quarter and 15.06% for the year.

The Wilshire U.S. Mid-Cap index rose 13.89% in the last three months of the year, and gained 25.11% for the full 12 months.  The comparable Russell Mid-Cap index was up 13.07% in the 4th quarter and gained 25.48% in 2010

Small caps fared even better.  The Wilshire U.S. Small-Cap index rose 16.32% for the quarter and 28.94% for the year.  Russell's 2000 small cap index was up 16.25% for the 4th quarter and 26.85% for the year.  The tech-heavy Nasdaq Composite Index rose 12.00% in the last three months of the year, finishing up 16.91% for 2010.

International stocks posted less robust gains, as questions swirled throughout the year about the soundness of European debt and the European banks that own it.  The MSCI EAFE index of developed country stock markets rose 6.23% in the 4th quarter, pushing the international composite share prices into positive territory with a gain of 4.90% for 2010.  The developing world fared better than the mature Western economies. The MSCI index of emerging and frontier markets rose a somewhat more robust 11.85% for 2010's final quarter, and finished up 28.70% for the year. 

Among the biggest laggards were, predictably, Greece (its Athex Composite Share Price Index fell 35.1% for the year), Spain (the IBEX 35 was down 17.4%), Italy (the FTSE MIB Index down 13.2%) and Portugal (the PSI 20 Index down 10.3%).  Japanese stocks didn't do much to boost the wealth of their investors; Japan's TOPIX Index fell 1% in 2010, and Hong Kong's Hang Seng Index (one of several proxies for Chinese stocks) was up just 5.3% for the year.  The UK's FTSE 100 Index rose 9%.  Of the largest economies, only Germany and India posted investment performance comparable to the U.S. indices.   Germany's DAX Index was up 16.1%, and India's Sensex Index rose 18.5% in 2010. 

Alas, once again we were not astute enough to position your entire portfolio in the country with the world's highest market growth; the 96% rise in Sri Lanka's ASPI Index did little to enrich our clients overall, and we also managed to miss the runnerup--Bangladesh, whose All-Shares Price Index rose 83.5%.  However, we feel fortunate to have avoided concentrating our portfolios in Bermuda, whose BASX Index was the international laggard, falling 44.4% in 2010.

Despite widespread publicity about housing and real estate woes, the Wilshire REIT index--which tracks real estate investment trust that invest in commercial and residential property--gained 7.87% in the 4th quarter and was up 28.60% for the year. 

The bond markets saw yields fall and bond values, which move in the opposite direction of yields, go up.  The Bank of America Merrill Lynch index of Treasury Bonds rose 5.9% in 2010 as the yield on 10-year notes fell to 3.29%.  The two-year note fell to 0.59%.  Both had touched near-record lows earlier this year; the 10-year note yielding 2.33% on October 8, and the two-year note was yielding 0.31% on November 4.

The numbers are not in yet on the economy's growth overall in 2010, but what we can see so far suggests that a double-dip recession is less likely than it seemed at the middle of the year.  The U.S. Government's Bureau of Economic Analysis reported on December 22 that the U.S. Gross Domestic Product (GDP) rose at an annual rate of 2.6% in the third quarter of 2010, which means growth accelerated a bit from a 1.7% increase in the second quarter.  Among the highlights: real exports of goods and services rose 6.8% in the third quarter, after a 9.1% increase in the second. 

This is the time of year when you hear a lot of market predictions similar to those which predicted gloom and doom in 2009, and caution in 2010.  It would be helpful if those who were offering market predictions wore wizard hats and gypsy shawls instead of business suits, and were required to peer into a crystal ball before uttering their pronouncements about the future. 

As it is, all we can do is point to some of the forecasts which came from respected or widely-followed analysts, which provide evidence that the future--and that includes next year's market gains--is essentially unknowable.  At the end of 2009, author Dan Solin provided an entertaining look at what would have happened if you'd followed the advice of various famous market analysts.  He notes that Jeremy Siegel, the professor of finance at the Wharton School and author of Stocks for the Long Run, predicted that the U.S. would avoid a recession in 2008 and that financial stocks would outperform the S&P 500.  In fact, financial stocks underperformed all market sectors, and the recession brought back memories of the 1930s.

Meanwhile, Professor Nouriel Roubini told investors to avoid the stock markets in 2009, warning of a further loss of 50% of your wealth.  Investors who followed this sage advice would have missed a 24% surge in the S&P 500 and a 37% rise in the Nasdaq index. 

It gets worse.  Jim Cramer, the guy who screams at you on TV, predicted that Goldman Sachs would finish 2008 at $300 a share and Google's share price would reach $1,000.  Goldman Sachs finished 2008 at $84, and Google ended the year at $307.  Better still, Elaine Garzarelli, president of Garzarelli Capital, advised her investors to buy Lehman Brothers, Bear Stearns and Merrill Lynch, noting their attractive share prices.  Two of those firms no longer exist, and the other was sold in a shotgun marriage to a large banking institution.

What about 2010's early predictions?  The web site BusinessInsider.com checked out the forecasts of legendary Wall Street strategist, Blackstone Group economist Byron Wien.  He forecast that in 2010, the U.S. economy would grow at a real 5% rate and the unemployment level would fall below 9%; the Fed would hike short-term interest rates above 2%, 10-year Treasuries would be yielding 5.5% by year-end, there would be zero gains in the S&P 500 and Japan would finish 2010 as the best-performing major industrialized market in the world

The lesson here is to be extremely cautious about pundits, anybody who can predict the future and conventional wisdom about the markets.  If we could predict the future with any accuracy, everybody would buy the stocks that were going up, raising the prices to the point where the returns would be essentially zero.

But...  If you're feeling adventurous, you can turn to the Rollins College web site (http://web.rollins.edu/~wseyfried/forecast.htm), where the predictions of professional forecasters, the Federal Reserve Board, economists selected by the Wall Street Journal, the Office of Management & the Budget, the Congressional Budget Office and the Wells Fargo organization are all laid out in a grid.  They all expect economic growth for the next two years, gradually falling unemployment and low inflation.  Let's hope they're right for a change.

The articles and opinions expressed in this document were gathered from a variety of sources, but are reviewed by LJCooper Wealth Advisors prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. In all cases, please contact your investment professional before making any investment choices. Any articles written by specific LJCooper advisors will include a ‘by line’ indicating the author.