Year End 2010 In Review

When money is once parted with, it can never return.
Jane Austen

The results have been tabulated and the winner is: The U.S. Stock Market. Yes, the U.S. stocks outperformed its international counterparts in 2010. While international stocks came in a distant second, bond funds began to languish. The U.S. S&P 500 Large Cap Index actually generated double digit gains of 15.1% return for the year.

These results seem implausible given the haphazard manner in which the returns were generated. In fact, more than half the gains for the year were generated in December. The S&P 500 rose 17 out of 22 trading days for the month. It was the best December in almost 20 years. If this were a ride at Disney most entrants would have thrown up by now, and the ride doesn’t seem to be getting any smoother or predictable.

In addition, the riskier the asset in 2010 the better it performed. U.S. Small (S&P 600) and MidCap (S&P 400) stocks each rose 27% while U.S. Large Caps (S&P 500) rose 15%. In all U.S. equity arenas (Large, Mid and Small Cap), the riskier Growth strategy outperformed Value. The Mid Cap (S&P 400) Growth ishares were up 30% while the Value strategy rose 22%. The same was true in the Small Caps (S&P 600) where Growth strategy delivered 28% compared the Value strategies 23%.

International stocks lagged the U.S. but still delivered solid performance. The Developed Countries’ index (MSCI EAFE Intl) grew 8% while the Emerging Markets fared better producing a 16.5% return. Similar to the U.S., the riskier international stocks performed the best with International Small/Mid Cap Growth funds, growing 22.3%.

As the year ended it became clear that there was a divergence in performance for bonds and stocks. Bonds became a trouble spot in December as interest rates began to rise. Much of this decline was in response to the positive economic news and despite the Federal Reserve announcing that it would be purchasing bonds. This market intervention (quantitative easing round 2) is referred to QE2 by the press. The Fed is buying bonds in order to pump more money into the financial system and drive long term interest rates down. Despite the Fed’s efforts long term interest rates have been creeping up. Remember, as interest rates rise the value of bonds fall. This trend will most probably continue next year making it even more difficult to generate consistent income in most retirement portfolios.

Commodities had a fabulous fourth quarter rising 16% after being essentially flat for the year. This surge was caused by strong demand for raw materials from emerging markets especially China. Investors continued to be drawn to physical assets (e.g. gold, silver) due to concerns about the continued instability of the international markets. This pushed prices in many commodities to multi-year highs that are probably not sustainable in the short term. Some of these gains have been erased in the first weeks of 2011 but the long term outlook for commodities remains strong.