Q4-10 Update

It was another great quarter for the stock market. The S&P 500 was up over 10% in the fourth quarter. Following an excellent third quarter, the stock market finished up 12.8% in 2010 at 1,257.54, the highest level since September of 2008.

The strength in the second half of the year was ironically influenced at least partially by government intervention. In August, the Federal Reserve indicated they were prepared to take additional action if the economic recovery in the US faltered. And in November the market rallied on prospects of extended tax relief. Other factors include a mildly improving economy, stabilizing housing prices, higher employment, expanding manufacturing, and rising commodity prices. Corporate balance sheets are strong with the highest level of cash since 1959.

Corporate earnings continue to be strong. Companies have been able to steadily improve the bottom line since the lows of 2008. Operating earnings on the S&P 500 should come in around $85 for 2010. (Earnings peaked at $86 in 2006). Projections for 2011 and beyond are for slowing growth but at $90+ in 2011 we can still assign a reasonable multiple on the S&P 500. Alternatives offer low yields with little chance of price appreciation. However, year to year earnings growth is becoming more challenging. Expectations are higher and it is less likely for upside surprises.

Gross domestic product growth was 2.6% in the third quarter. 2011 is expected to show low growth.

Commodities were up again in the fourth quarter. Crude oil was up 14% to $91.38 per barrel. Gold was up about 8.5% to $1,421.10 per ounce. Commodities have rallied on demand from emerging economies like China as well as investors.

The housing sector continues to bounce along the bottom. There are still foreclosures and inventory. Prices are low and so are starts. Credit standard are much higher and about a quarter of all borrowers are still underwater.

The unemployment rate declined to in at 9.4% in December. Weak job market expectations remain but there has been some private sector job creation and the unemployment rate seems to have stabilized.

The Federal Reserve maintained the 0.00% to 0.25% range for federal funds. Despite the Fed’s efforts to keep rates low, the interest rate on the benchmark 10-year Treasury bond rose from 2.52% to 3.30% during the quarter. Taxable bonds in general lost 1.3% during the quarter and municipal bondsdeclined 4.2% as investors worried about the deteriorating financial condition of a number of municipalities.

Core consumer prices continue to rise very slowly. November’s reading of core items was up less than 1%. Even though there is very little inflation officially, continued large deficits and the creation of dollars may play a prominent role in the future.

Equities all over the world also moved higher in the fourth quarter. Europe was up 4% and Japan was up 12%. The emerging markets were also higher by about 7.25%.

Please let us know if you would like additional information on any of the above.

Looking forward to 2011 there are plenty of reasons to be optimistic. Taxes are not going higher and actually decrease with a payroll tax reduction. Initial unemployment claims have declined. Corporate earnings growth remains steady, keeping valuations reasonable. Core inflation remains contained. Merger-and-acquisition activity is solid. Household net worth and confidence are rising. The election cycle favors the pre-election year (2011).

Of course there are risks. The unemployment rate remains high. Housing remains a concern with foreclosures and high inventories. Debt issues threaten many a state and municipality in the US. Europe faces several sovereign debt problems. China continues to tighten monetary policy to combat inflation and rising real estate. With investor sentiment bullish, complacency can set in and market volatility could return to erase some of the recent rally.

Financial Briefs

Featured News

Company Information

6611 University Ave. Suite 201
Windsor Heights, IA 50324

Phone 515-633-2875
Fax 515-277-3538
info@forrestfinancialservices.com