Saturday, January 16, 2010

Positive Equity Market Returns Probable In 2010

Given the magnitude of the market's advance in 2009 and more specifically off of the March low, what does history suggest for the coming year? As the below chart details, the 65% return for the S&P 500 Index from 3/9/2009-12/31/2009 is the second best return period for the market during the first year of a bear market recovery. The only higher period is the 124% return achieved in the 1929 - 1932 period.

Source: Fidelity Investments-Room For Stocks To Run?

The red circle on the chart highlights the fact the market remains 29% below the 2007 high. The average for the prior bear market periods is -14% with the median equaling -8%. This market cycle seems most similar to the 1937 - 1942 period from a return perspective. This being the case then, positive but muted returns are probable in 2010. In a low return environment, dividends will be an important part of investor returns.

If the market is similar to the 1937-1942 period, investors might want to be cognizant of policies that impacted the market and economy during the '37-'42 time period. I must say I am not in agreement with some of the author's conclusions in the article at the previous link (like continued deficit spending). What is important for investors is to understand the policies that were instituted at that time that may have prolonged the recession during that period--like the Wagner Act. Some of the policies out of Washington today look similar and could derail the recovery past 2010.

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