Market Review
Economic Review
By the end of 2009, the recession was technically over by the most generally accepted definitions. Economic experts, however, continue to warn that the recovery will be sluggish at best. The US economy continued to shed jobs and total non-farm payroll averaged a decline of 69,000 jobs per month in the fourth quarter. While this is a substantial improvement from the 691,000 jobs lost on average each month in the first quarter of 2009, the unemployment rate of 10.0% at the end of the year is indicative of the struggle many Americans are experiencing. The dollar neither significantly gained nor lost value against the other major currencies of the world during the quarter; slight gains against the Euro and Yen, slight declines against Canadian and Australian dollars. The US trade deficit was trending up toward the end of the year, as the monthly deficit for October and November reached $33.4 billion and $36.7billion, respectively.
Financial Markets Review
The unanimously positive returns of the third quarter continued into the fourth quarter for all major asset classes, although to a lesser degree. The Fed kept the target Fed Funds rate at 0-0.25%, where it has now been for over a year. While short-term treasury rates ended 2009 near 0, the fourth quarter saw significant steepening at the long end of the yield curve, as 30-year treasury rates rose to 463 basis points from 403 basis points at the end of the third quarter. The markets began to brace themselves for uncertainty due to the world’s governments pulling back on their injections of liquidity. Commodities had both a positive fourth quarter and year with the S&P/Goldman Sachs Commodity Index returning 8.4% and 13.5%, respectively. Fears of a debt default in Dubai put investors on edge, leading to worries about a next leg down in the ongoing credit crisis.
All major asset classes finished positive for both the quarter and year ending December 31, 2009. Domestic stocks, emerging market stocks and REITs were the strongest quarterly performers. Bonds and developed international stocks had relatively weak performance for the quarter.
Domestic Equity Review
Domestic equities ended the year on a positive note. The Russell 3000 Index posted a 5.9% return for the fourth quarter and a 28.1% return for the year. From March to December, the markets rallied tremendously, with the S&P 500 Index gaining 54.6% during the period and the Russell 3000 Index gained 56.5%. Growth, value, large and small; domestic equity investors in all styles were rewarded with gains for the quarter and year. With the exception of Financial Services, all sectors of the Russell 3000 Index had positive returns for the fourth quarter. The volatility of the Russell 3000 Index for the last year, as measured by the standard deviation of monthly returns, was 21.7%, nearly identical to the 21.4% of the prior year.
Reversing the trend of second and third quarter 2009, large cap stocks outperformed small cap in the fourth quarter. For both the quarter and the year, the performance of the Russell 3000 Growth Index exceeded that of the Russell 3000 Value Index. The streak of quarters with positive returns in all economic sectors ended as the Financial Services sector posted a negative fourth quarter return. All sectors were positive for the year.
International Markets Review
The positive performance of international equity markets largely continued into the fourth quarter, with the notable exception of Japan. All developed international equity markets achieved positive returns for the year, rebounding from universally negative returns in 2008. Emerging markets completed its year-long sweep of out-performance over the developed markets. The MSCI Emerging Markets Index out-performed the MSCI EAFE Index for each quarter of 2009. Despite this, the MSCI EAFE Index turned in another positive quarter, with a 2.2% return. The Dubai default worries led to investor apprehension about what other issues might be lurking in international markets. Some commentators raised concerns about the viability of Greece, Ireland, and others including the United Kingdom.
Developed international equity markets were led by the MSCI United Kingdom Index return of 7.0% for the quarter; conversely the MSCI Japan Index trailed all others with a -2.8% quarterly return. The MSCI Emerging Markets Index returned 8.6% for the quarter, with its strongest performance coming from Latin America. Unlike the prior two quarters, the MSCI EAFE Growth Index outperformed the MSCI EAFE Value Index.
Fixed Income Review
The fourth quarter of 2009 produced returns in the major fixed income sub-classes that were near zero, with the notable exception of high-yield corporate bonds. Government bonds again found their way into negative territory, with the Barclays Capital Government Bond Index returning -1.0% for the fourth quarter. High quality corporate bonds had a slightly positive quarter, with the Barclays Capital US Credit Index returning 1.0%. High yield corporate bonds had a more successful quarter as shown by the 4.8% quarterly return for the Barclays Capital Corporate High Yield BB Index. The international fixed income markets also found positive returns for the quarter. The Citigroup World Government Bond Index returned a strong 6.2%.
|
