U.S. stocks closed out the final session of the year on a quiet note as the major indices traded flat on Friday.  Volume was virtually nonexistent; one of the lowest trading sessions in recent history.

Telecoms, financials, industrials, materials and consumer staples were the five major industry groups to close higher for the day.  Consumer discretionary (the year’s top-performing group), tech, health care (the year’s worst performer), energy and utilities ended down. 

Appropriately, the CRB closed out the year at a new post-crisis high; the index’s final-session performance was led by the prices of sugar, corn, gasoline and a late-session spike in crude oil. 

The major indices clocked a strong 12.78% gain for the year thanks to a near 20% rally in the final four months of 2010 – mid-year the broad market was on the slide as a flash crash-provoked double-digit correction had investors quite concerned.  One can forget about such things very quickly though when stocks go into rally mode.  More on that below.  

Market Activity for December 31, 2010

A Quick Review

It was another wild year for stocks in 2010.  A mid-year 16% correction spread fear, but concern quickly evaporated thanks to a powerful rally in the final four months as Chairman Bernanke outlawed fear.  The S&P 500 went from down 8.5% as of July 2 to close the year up 12.78%. 

The yearly gain marks the second-straight annual upswing as the broad stock market rebounded from the 38.49% plunge in 2008 – and a fantastic rally it has been off that nefarious 13-year low of 666 on the S&P 500 that had the index down 57.4% from the 2007 peak – we’re now within 25% of that 1565 all-time high.    Certainly though, even as the economy has improved from the deepest recession in the postwar era, the rally has been hugely tilted to financial assets rather than economic growth. 

So the S&P 500 Index’s 12.78% pick up for 2010, follows 2009’s 23.45% bounce.  But commodity’s, as measured by the CRB Index, bested the annual performance of stocks as that measure gained 17.49% -- the leaders were cotton (up 89%), silver (up 81%) and corn (up 49%); prices of natural gas and cocoa were the only of the 19 CRB components that declined for the year.  Bonds, as measured by the Barclays Total Return Index, gained 6.18%.

While it may seem like 2010 gained ground with certainty due to the nearly 20% surge in the final four months of the year, a period that immediately followed Fed Chairman Bernanke’s now famous Jackson Hole speech in which he offered the first signal that QE2 was coming, go back to early July and the direction of stocks was quite precarious (as the chart below illustrates).  In fact, it appeared as if we were headed for another big slide as the May 6 flash crash hammered an already weak level of market confidence.  But Big Ben came to the rescue and traders relied on the fact that the Fed would be there to backstop riskier assets.

For the economy, we failed to get that “V-shaped” recovery (which actually takes the form of a check mark as the normal recovery from deep recession overwhelms the prior cycle’s rate of growth by a multiple of 2.5, averaging GDP growth of 7.5% in roughly the first year of recovery), instead growing below trend.  We’ll see 2010 GDP come in at 3.0% (and that’s assuming we get a 4% print for the fourth quarter on the back of huge consumer spending during the final three months of the year).  This is a rate of growth that’s simply insufficient to bring the jobless rate lower, which at the current level of 9.8% has us stuck at 9.5% or higher for longer than any time in the postwar era.

Nevertheless, the rally in stocks over the past couple of years has been hugely helpful.  It will be very interesting to watch how things play out over the next 12-18, 24 months as things have been greatly assisted by numerous forms of stimuli. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900