Reflections On The Year That Was

The market looks like it's going to limp into year-end, with volumes levels so light it makes you wonder who is still around on the trading desks. Oh yeah, me. That's who.

The jobless claims figures this morning were pretty good, coming in less than expected at 432,000, which puts claims at their lowest level in 15 months. Moreover, the continuing claims figure (4.98 million) is the first reading below 5 million since February. So the jobs picture continues to improve, and we should see some actual job growth next year.

Overall, we are ending the year in solid fashion, as the market is still up nicely for the month of December, as well as on the year. If the S&P 500 closed at these levels today, it would be up +24% for 2009. That's a great year, and a phenomenal one given how poorly the year started out in the first few months of 2009.

After the dismal experience of 2008, many were hopeful that the markets had bottomed and 2009 would show improvement. But as the markets began to slide further in the first quarter of '09, bearish sentiment began to rise markedly and few had any hope whatsoever that the markets could bottom and start to rally again.

I know that sentiment had gotten to a low point when I began to receive calls from clients saying that they no longer cared if they made any money going forward, they just didn't want to lose anymore. (Funny though, after the markets rallied strongly, few remembered having said this)

By March, the markets were already down roughly -25%, and it was hard to see how things could get worse. Around this time, we started communicating to clients that things didn't need to get better right away for the markets to rally, they only needed to stop getting worse. The markets were so oversold (the most since 1938 by some measures), that a sharp relief rally was right around the corner.

We dipped our toes back in the market, and made some buys at very good prices. Our clients were so gun shy, that it was hard to be too aggressive. When the markets began to lift, many thought it was just a bounce, and that a retest of the lows was likely.

We continued to espouse our 'green shoots' theory, that the seeds had been planted for the economy to improve later in the year, but that the markets would continue to anticipate the improvement, and you had to stay invested to reap the benefits. While we were right to be bullish early, even we were surprised by the relentless climb higher by the market, with few pullbacks along the way.

We quickly nicknamed the action the 'stair-step' market, since the market seemed to go up for a while, then move more sideways then down, before making another move higher. This type of action offered few good buying opportunities in the form of pullbacks, and continually made portfolio managers pay up for stocks. You might be surprise to learn that after the first 2 down months of the year, there would only be one more down month for the year (October).

Nearly all groups have participated, with tech and materials leading the way, while defensive groups like consumer staples and utilities have lagged. Commodities and emerging markets have also had a very good year, with some sectors (steel) and emerging markets (Brazil, Russia) even doubling for the year. And growth stocks handily outperformed value.

As for what next year holds, that will have to wait for another post. I want to wish everyone a very happy and prosperous new year. And here is an Irish toast I just learned, "May the best of this year be the worst of next year!"