Wall St. closes year of tumult
Wall Street on Thursday closed out a wild year with a last-minute bout of apprehension -- fitting enough, given the gigantic questions that loom for the economy and financial system in 2010.
In 2009, key stock market indexes scored their biggest gains in at least six years as they rebounded from lows in March that smacked of a U.S. going-out-of-business sale.
Investors also reaped huge returns in most foreign markets and on junk bonds and many commodities as fear of global depression gave way to hope for a sustained economic recovery.
The Dow Jones industrial average marked its last day of 2009 with a loss of 120.46 points, or 1.1%, to close Thursday at 10,428.05 after a late sell-off. For the year, it surged 1,651.66 points, or 18.8%, its biggest annual advance since it rose 25.3% in 2003.
Broader indexes had a better year, although all remain well below their record highs reached in 2007: The S&P 500 rallied 23.4% and the Russell 2,000 small-stock index rose 25.2%. The technology-heavy Nasdaq composite jumped 43.9%, powered in particular by triple-digit percentage gains for Apple and Google.
But those hefty returns make the year look far easier than it was on many investors’ nerves.
Shareholders trying to hang on had to endure the abject desperation of January and February, when the market was gripped by dread that recession would turn into depression and that some huge chunk of the U.S. banking system would be nationalized.
By March 9 the Dow and other indexes were at 12-year lows, and Wall Street seemed bereft of hope.
At that point the selling wave that began with the credit markets’ meltdown in September 2008 finally exhausted itself and buyers began to get the upper hand. They’ve pretty much been in control since.
Byron Wien, vice chairman of investment firm Blackstone Group in New York and a 50-year veteran of Wall Street, said investors’ change of heart reminded him of a truism he learned early on in the business: “The world is coming to an end. But not now.”
If what the bulls saw was a global economic recovery coming, they got it right: Growth has revived worldwide since the second quarter, thanks in no small part to the trillions of dollars in financial support supplied by governments and central banks from Washington to Frankfurt to Beijing.
The Dow has soared 59% from its March 9 closing low of 6,547.05. The S&P 500 is up 65% since then.
Some big-name stocks that were priced for bankruptcy have come roaring back. Ford Motor shares, which bottomed at $1.58 in March, closed the year at $10, for a 532% gain. Bank of America which fell as low as $3.14, has since risen nearly fivefold, to end 2009 at $15.06.
All in all, the value of U.S. stocks has increased by a stunning $5.6 trillion from the market’s nadir, to $13.4 trillion at year end, according to Wilshire Associates.
Though investors who held on no doubt will be grateful for stocks’ comeback, the rally since March -- which hasn’t suffered even a 10% pullback along the way -- has been agonizing for the unknown numbers of people who sold out as shares collapsed and have been too terrified to get back in.
If they’ve kept their cash in short-term accounts, they’ve earned virtually nothing this year. The average annualized yield on money market mutual funds is a mere 0.03%, according to IMoneyNet Inc.
Some market pros note that stocks’ steady upward path has spawned more than the usual rash of theories about possible manipulation aimed at keeping prices aloft.
Joe Saluzzi, a trader at Themis Trading in Chatham, N.J., said he believed that the rally in recent months has been almost entirely driven by short-term traders simply riding -- and abetting -- the market’s momentum.
“Who are the buyers? It’s the momentum players,” he said. Many institutional investors, he said, have stayed on the sidelines.
Still, improving economic data have supported the snap-back in share prices.
At a minimum, the upturn in economic indicators has made many big investors reluctant to sell. Likewise, corporate earnings have improved markedly, albeit largely from cost cutting.
But with the turn of the calendar to 2010, many questions about the economy and financial system will come into sharper focus.
At the top of the list: Can the economic recovery -- and rebound in earnings -- continue even if governments and central banks begin to pull back on their financial support?
The Federal Reserve has signaled that it wants to begin withdrawing some of the emergency lending programs it put in place as the credit crisis worsened.
Yet some analysts believe that the U.S. economy and banking system, still burdened by massive levels of debt from two decades of soaring borrowing, will be too weak in 2010 to justify the Fed’s raising its benchmark short-term interest rate from near-zero levels.
In a report Thursday, Goldman, Sachs & Co. economists reiterated that they expected the Fed to stand pat with short-term rates for the entire year.
Other major concerns that will dog Wall Street in the first quarter: the likelihood of rising bank losses on commercial real estate loans, and a major wave of interest-rate resets on so-called option ARM mortgages issued at low initial rates in recent years.
Despite the financial system’s seeming stabilization, “If you think we’re out of the woods, you’ve got another thing coming,” said Dave Rovelli, head trader at brokerage Canaccord Adams in New York.
Even so, he said, he believes the market could be helped along by encouraging earnings news, particularly from the tech sector as corporate spending ramps up on computers and other equipment.
Here’s a look at some of the market highlights in 2009 by investment type:
* U.S. stocks. As usually happens after a severe bear market, the stocks that fell the most in the decline rebounded the fastest once investor sentiment turned.
The Russell 2,000 small-stock index, which on March 9 was down 60% from its record high reached in 2007, has rocketed 82% from its low.
The Nasdaq composite, which lost 56% from its 2007 high to the March low, has soared 79% since then.
As investors regained faith in the economy, they focused on stocks that typically have the most to gain from a recovery. Within the S&P 500, tech stocks led in 2009, rising nearly 60%.
Apple shares rallied 147% for the year, to close at $210.73, on rumors that the company would unveil its long-awaited tablet computer in January.
The second-strongest stock sector in 2009: producers of basic materials, tracking the rebound in prices of many commodities. The sectors that rose the least for the year: Electric and gas utilities and large telecom firms, which usually take a back seat to faster-growing companies during economic recoveries.
* Foreign stocks. Most foreign markets beat the returns on U.S. blue-chip stocks in 2009 -- after mostly losing much more than U.S. issues in the bear market.
Emerging markets zoomed, reflecting investors’ increasing faith in the long-term growth prospects of those economies. Brazil’s main share index surged nearly 83% for the year. China’s Shanghai composite index was up 80%.
The Russian market rocketed 129%, helped by rising oil prices. Near-term crude oil futures in New York finished the year at $79.36 a barrel, up 78% from $44.60 at the end of 2008.
U.S. investors’ returns on foreign stocks were further boosted by the dollar’s decline against most foreign currencies for much of the year, although the greenback has revived over the last month.
The Brazilian market was up 142% when translated into dollars. The British market, up a modest 22% in pounds, was up 35% in dollars.
* Bonds. Investors who flocked to the safety of U.S. Treasury securities a year ago may be regretting it: Market interest rates on longer-term Treasuries rose sharply as the economy improved, devaluing older bonds issued at lower rates.
The yield on the 10-year Treasury note ended the year at 3.84%, up from 2.21% at the end of 2008. The two-year T-note yield ended at 1.13%, up from 0.77% a year ago.
Unprecedented Treasury borrowing to fund the budget deficit also put upward pressure on bond yields, as investors forced the government to pay up.
But interest rates on other types of bonds mostly declined in 2009 as investors’ appetite for risk-taking returned.
The average annualized yield on an index of 100 junk bonds tracked by KDP Investment Advisors plunged from 14.58% at the start of the year to finish at 8.09%. That boosted the value of older junk bonds.
The result: The average junk bond mutual fund scored a total return (interest earnings and price appreciation) of 46% for the year, according to Reuters Lipper data.
* Commodities. Prices of most raw materials rose with investors’ optimism about the global economy, and as a falling dollar for much of 2009 made commodities relatively less expensive for foreign buyers whose currencies were strengthening.
Aluminum futures prices surged 46% for the year. Cotton prices jumped 54%. Sugar was a standout, zooming 128%.
Gold benefited for most of the year as investors sought an alternative to the sinking dollar. The metal reached a record high of $1,218 an ounce early in December. But the dollar’s rebound since then has knocked gold back: It ended the year at $1,095.20 an ounce in New York futures trading, for a net gain of 24% from a year earlier.
