January 2010
The economy finished the year with two consecutive quarters of growth and is positioned to continue the trend into the New Year. This is quite remarkable considering the economy’s near death experience barely a year ago. Investors, however, are still likely to face several more quarters of challenging economic conditions as unemployment remains near post-war highs and the housing market enters its fifth year of decline.
Anticipating the recovery in the economy, the stock market rallied vigorously. The S&P 500 rose an impressive 68% from the lows that were set in March, although it still remains down 24% from its all time high. Technology stocks led the revival and remain well positioned for the coming year due to technology’s productivity enhancing nature and rapid obsolescence of existing products. Along with technology stocks, materials, industrials, and energy stocks are poised to participate in the continued expansion of both the domestic and global economies.
The main trend for the year in the bond market was the exodus from safe haven intermediate and longer maturity treasuries to higher yielding and riskier credits. The long maturity Treasury bond index declined 17% for the year, which was one of the worst returns in decades. Investors’ risk appetite grew while the appeal of Treasuries waned as bailout packages stabilized the auto and banking industries and stimulus measures increased demand. We expect that this trend will continue and may possibly be exaggerated by any preemptive moves from the Federal Reserve.
The big question that will be answered in the coming year will be whether the recovery is real and lasting. The durability of the expansion will be tested by a consumer who is facing a very weak, but slowly improving labor market and a housing market that continues to show no real signs of recovery. Looking to fill the gap left by the balance sheet strapped consumer will be a plethora of government spending programs which will include the giant stimulus measure that was passed last year, of which, nearly three-quarters will be spent this year. This, in conjunction with improving global growth and additional pump priming before the mid-term elections, will put the Fed in a difficult position. If the Fed is timid in raising interest rates because of political sensitive high unemployment, it may be creating a breeding ground for virile inflation if the expansion proves to be robust. In due time, we will have our answer.
Florida Investment Advisors has recently completed our annual filing with the Securities and Exchange Commission. In keeping with our goal of providing complete disclosure to our clients, our annual filing can be reviewed during business hours at our office at 601 Bayshore Blvd., Tampa, FL, 33606, or a copy can be mailed to you at your request.