Q4-09 Update

The stock market continued to rise through the end of 2009, benefiting from low interest rates and improving corporate earnings. The S&P 500 increased another 5.5% in the 4th quarter to log an impressive 23.5% performance for the year. The market rallied almost 60% from the lows of March 9th, 2009.

Corporate earnings improved steadily throughout the year. Operating earnings on the S&P 500 should come in around $56 for 2009. 1,125 on the S&P 500 values the broad market index at about 20X trailing operating earnings. 2010 earnings are expected to improve over 2009. The stock market may have already effectively priced in a 30%+ increase in earnings to $75+ next year. 15X $75 puts the S&P 500 about where it is now and so is probably fairly valued. Expectations were generally low in 2009 and as companies were able to exceed estimates their stocks moved higher. Looking ahead to 2010, comparisons get more difficult and expectations are higher. In that scenario it becomes more challenging to outperform.

Final gross domestic product growth turned positive in the third quarter 2009 after a year of negative readings. The 2.2% annualized gain probably marks an end to the recession. The fourth quarter will likely be positive too. 2010 is expected to show slow growth.

Commodities varied the fourth quarter. Crude oil closed up about 12% at $79.36 per barrel. Gold was up again to over $1,100 per ounce.

Home prices nationwide have shown some quarterly appreciation. Prices are still lower than last year and down significantly from the peak. Extended tax credits for first time home buyers probably account for at least some of the improvement.

The unemployment rate is hovering around 10%. November’s figures were better / “less bad” than expected and revisions to prior months actually caused the rate to fall from 10.2% to 10.0%. Temporary hiring and is likely behind the revisions. Still there have been about 2 years of negative job growth and the highest unemployment rate since the early 1980s. Weak job market expectations remain even in an economic recovery.

The Federal Reserve maintained the 0.00% to 0.25% range for federal funds. The yield on 10-year Treasury Notes did move up slightly in the fourth quarter from last quarter’s low level to 3.84%.

The Fed is still not concerned about inflation. High unemployment and idle capacity do not put much upward pressure on prices. Core consumer prices are up less than 2% so inflation remains a non-factor. Even though there is very little inflation officially, continued large deficits and unconventional policies will probably play a prominent role in the not too distant future. There is some risk that inflation will spike up.

Equities all over the world moved up again in the 4th quarter. Excluding the U.S., stocks were up 3.3% in the Dow Jones Global Index. Emerging markets performed slightly better than other developed markets in general.

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

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