To say 2009 was memorable is an understatement.
To future historians and economists it will be the year to which all forthcoming bear and bull markets will be compared. For investors, recovery was the word for 2009. In fact, the volume for Google searches and news references for the word “recovery” soared over the course of 2009, especially relative to the word of 2008: “recession”. 2009 began in the midst of a bear market plunge that was the worst since 1932 and the free-fall suddenly rebounded into a “V”-shaped rally of 65% from March 9 through mid-December, the most powerful nine month rally in the S&P 500 since 1933.
 
For 2010, ‘sustainability’ may be the word—not merely because climate change will be on Washington’s agenda, but primarily as it pertains to continuing the economic and market recovery witnessed in 2009. In brief we believe,
  • The recovery is likely to be sustained with economic growth in the 3-4% range in 2010.
  • Stocks are likely to post gains early on that are later cut in half to end the year in single-digits, and
  • The bond market will likely post flat-to-mid single-digit gains as higher rates and wider spreads pressure returns.
 
However, following a solid start to 2010, we expect a challenging second half of 2010. We anticipate the extraordinary global policy efforts that created a tailwind for markets in 2009 will fade or even transition to headwinds that contribute to a renewed slowdown in the economy and a potentially challenging latter half of 2010 for investors. Also, much like 2009 throughout 2010 there will be crosswinds that may make this transition uneven and introduce risks to our forecasts.
 
During 2009 our overall market outlook turned increasingly positive, but in 2010 the landscape will likely shift from rewarding risk to benefiting a more conservative stance. As global economic stimulus fades or even reverses in the latter part of 2010, similar to past rising rate environments, markets experience greater volatility and may shed some gains. As these signs emerge, investors should take profits in relatively riskier investments and, where possible, shift to more defensive, less risky ones to protect first half gains. Trimming exposure to those investments that benefited from the tailwinds to lock in profits and shifting the proceeds into those investments that may benefit from rising headwinds is a prudent plan of action. Again in 2010, a tactical approach to investing will be important to maintaining the path to long-term financial independence.
 
For additional insights, click on the tab for Outlook 2010 for our review; that fully explores the tailwinds, headwinds and crosswinds ahead. As always, please contact me if you have any questions.
 
This research material has been prepared by LPL Financial.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) are appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  All indices are unmanaged and cannot be invested into directly. 
 

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