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Looking Back, Looking Ahead… What Do We See on the Stock Market Horizon?
By Johann Klaassen

2009 in the Rear View

A year ago, we were shaking our collective heads and wondering, “What went wrong?” The market’s results in 2008 were abysmal, and many pundits were predicting the same or worse for 2009. The first quarter of 2009 didn’t inspire any particular hope, as the S&P 500 hit its low point for the year in early March.

But three quarters of dramatic returns followed. The stock market jumped about 60% from the lows of early March through year-end, bringing the total return for the S&P 500 to a very good 26.5% for calendar year 2009. Interestingly, financial institutions (banks, brokerages, and the like) led the way in the upswing of 2009, just as they had led us into the pit in 2008.

A Dreadful Decade

When the decade began, some market gurus were sure that it really was going to be “different this time.”  They (and those who believed them) were at least partly right, as it certainly was different from the previous 20 years—just not quite in the way they presumed.

Hope gave way to worry early in 2000, with markets peaking in March, and worry gave way quickly to despair. At the beginning of 2000, some foresaw an entirely new economy and a perpetually roaring market, based on the promise of dramatic new computing technologies.

Instead, investors experienced a decade of market returns worse than any ten-year period other than the two that ended in 1937 and 1938. The average annual return of the S&P 500 for these last ten years has been about -1%, even when we include the impact of rein-vested dividends. If we include inflation, the picture gets even worse. Adjusted for inflation, the decade that just ended is worse for the U.S. stock market than any since the 1820s, when we began keeping clear records.*

What Do the Tea Leaves Tell Us?

As human beings, our minds look for patterns and see them everywhere, even in places where there is no objective evidence of a pattern to be discerned.  And, we are not particularly good at drawing conclusions from the real patterns we do manage to spot. Today, we see that the last year has been terrific, and the last ten years have been dreadful; so what should we say about the coming year, or the coming decade?

Many articles in popular business magazines in 1999 and 2000 seriously argued that earnings did not matter anymore, because the internet was revolution-izing the way the world would do business. Those who resisted this “new paradigm” were to be ignored, of course, because they “just don’t get it.”

Last January, a lot of us were reading articles that purported to show exactly how the current market trajectory (down!) was going to lead to the end of capitalism, the end of the modern nation-state, the end of contemporary society, perhaps the end of the human race itself. Those who did not believe these predictions were to be derided as starry-eyed optimists who simply refused to see the writing on the wall.

Students of the market know that corrections are an inevitable part of bull markets. While there is much optimism that 2010 will be another overall good year for stocks, increased volatility is likely, along with a downdraft here and there. How much of a correction we will actually experience cannot be known. Historically, “normal” bull market corrections range from 5% to 10%.

Predictions for 2010 and Beyond?

First Affirmative’s Investment Committee tends to agree with Yogi Berra: “It’s difficult to make predictions, especially about the future.”

Just about the only prediction we are comfortable making about how the stock market will behave over the next year, or the next ten years, is that the market will go up, and it will go down. But, we are not willing to attempt to predict when or by how much.

However, we are confident in predicting that a broadly diversified portfolio, specially tailored to reflect a client’s personal tolerance for the sometimes wild variability of the market, along with their personal ethical values and social commitments, will be the best defense against the risks inherent in every investment.

Of course the best way to make sure that your portfolio is positioned to accurately reflect your view of the world and your place within it is to schedule a portfolio review with your First Affirmative Financial Network advisor.

Johann Klaasen
VP, Managed Account Solutions

* “Investors Hope the ’10s Beat the ’00s,” Tom Lauricella, Wall Street Journal, December 20, 2009.

Posted: January 25, 2010