2009 Fourth Quarterly Letter to All Clients

Published: February 26th, 2010

Happy New Year!  Going into 2010 is certainly met with a lot more calm after the financial storm of just over a year ago.  There are two things that most analysts seem to agree on these days:  We are not on the brink of another Great Depression and it is unlikely that we will see another 60 percent surge in the stock market anytime soon. This begs the question – where do we go from here?  Recently, the cover of Business Week had an interesting title on their cover: “Buy? Sell? or Pray?”.  We all know that the investment landscape in 2009 was much easier navigated than the turbulent one in 2008.  Most often, the returns in any given market of over a year ago would be a distant memory.  However, what happened in 2008 will be forever burned in our memories and not so easily forgotten.  So just what do we do for 2010?  Do we buy, sell or pray?

 Let’s first review a few things about 2009.  It’s no secret that 2009 was a banner year for stocks.  The US stock market ended the year with a comeback of historic proportions.  The recession actually could have been much worse. We are witnessing banks starting to repay bailout money sooner than expected and the unemployment rate actually fell a couple ticks to an albeit still – miserable 10%.  On the bad side, the U.S. unemployment rate hit a quarter-century high and the federal budget deficit grew to its biggest share of the economy since 1945.  This will remain an ongoing concern for 2010.  Henry Paulson pushed for the unpopular TARP that helped stabilize the financial system.  The Fed reduced short term rates and found ways to support lending in a system that was already clogged. All of these things more or less did what they were intended to do and the good news is that we did not enter a second depression.  Many of the measures put in place did in fact support the economy and pull us out from the brink of collapse. 

It is evident that the economy and financial markets have embarked on a recovery and the most probable scenario is that these recoveries will strengthen and mature for a number of reasons. Cyclical sectors of the economy including auto, housing, business equipment and inventory have been at extremely depressed levels.  These sectors represent areas of the economy where consumers can adopt a wait and see attitude and put off decisions for buying.  This in turn creates pent up demand and when unleashed, these four sectors can make a significant contribution to the GDP – Gross Domestic Product.  The housing sector has shown signs of stabilization thanks in part to the Fed’s willingness to expand its balance sheet to drive down mortgage rates.  Several of you have profited from this in the many refinancings you have personally undertaken! 

Both fiscal and monetary stimulus remains in place. Currently, only $254 billion funds (or 32%) out of the $787 billion in stimulus funds had been paid out.  This is according to the website Recovery.gov as of 12/25/09. We’ve already seen the effects in 2009 due to the stimulus and although some will bemoan the deficits in the long run, we have experienced the added benefits in the short run.  Short term interest rates were slashed and in the latest Fed meeting, they have decided to hold rates steady.  The FOMC (Federal Open Market Committee) has suggested that economic activity has continued to pick up and that the deterioration in the labor market is abating.  The housing sector is showing signs of improvement.  Household spending appears to be expanding although remains constrained by a weak labor market.  Businesses are now adding to inventory stocks to bring into alignment with sales as opposed to reducing inventory.  Financial market conditions have also become more supportive of growth.  The Committee expects that inflation will remain subdued for some time.  At their last meeting on December 15, 2009, the committee decided to maintain the federal funds rate at 0 to .25% and continues to anticipate that economic conditions are likely to warrant low levels of federal funds rate for an extended period. 

Interestingly enough, I decided to compare the FOMC notes of their meeting at the same time one year ago in December of 2008.  At that meeting, discussion was about deteriorating labor market conditions and consumer spending, and declining business investment and industrial production.  Financial markets were quite strained and credit conditions tight.  The outlook for economic activity had weakened further and was gloomy.  Today, the big macro-economic issue of restoring health to the economy and financial market remains paramount, suggesting very low short term interest rates throughout 2010. 

Several economic stimulus provisions were set to expire around the end of 2009.  One very popular one received an extension into 2010.  The Homebuyer tax credit allows first time homebuyers with an income of no more than $75,000 ($150,000 for couples) to get an $8,000 tax break if you are in a contract by April 30 and if you close before July 1.  If you have owned the same home for at least five years, you can now get a tax credit if you buy another within the deadline.  

So what is in store for 2010?  Last year, buying was out of favor.  For some investors, sitting on the sideline was more comfortable than taking any further risks after the burn of 2008.  If you keep your emotions out of it, you’ll ask yourself, “Am I a long term investor?” If you answered, “yes”, then you should be invested in this market. We believe the economy is finally on the verge of producing some jobs based on the seven consecutive increases in the index of leading economic indicators, steady decline in initial unemployment claims, and the increase in the hiring of temporary workers. The economic rebound may still have some dips, but it may be more secure than some realize.   For this reason, the theme this year should be a move away from the emotional extremes of the last year.  The financial trauma fostered a misallocation of some investor assets and the focus should remain a commitment for the long term. 

As always, we encourage you to come in for a portfolio checkup.  It is a great time to review how your portfolio is invested and allocated, to discuss your risk tolerance and most importantly to let us know how you are doing and discuss any major life changes that require planning. 

May 2010 prove to be a prosperous year for all! 

Sincerely,

ARISTA WEALTH ADVISORS

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