Tuesday, December 29, 2009

Remarkable Year for Stocks

With 2009 winding down, it seems like a good opportunity to look back at what a remarkable (to put it lightly) year it’s been for stocks. The S&P 500 Index opened the year at 903, in the midst of an historic bear market after tumbling by more than 600 points from its October 2007 high of 1,565. Stocks closed higher for the first two days of 2009, but then suddenly turned and crashed to new lows as the financial crisis intensified, before ultimately reaching a bottom at 666 on March 6th. The top to bottom decline in the S&P was a staggering -57%, making the 2007-2009 bear market the worst since the Great Depression.

Since then, however, stocks have rallied nearly uninterrupted for more than 9 months. Yesterday, the S&P closed at a fresh 2009 high of 1,127, having rebounded by almost 500 points from its March nadir, which has certainly been welcome relief for investors. While impressive, stocks have merely returned to where they were last October. They still haven’t fully recovered their pre-Lehman Brothers level, which was 1,250 on the S&P 500.

In percentage terms, the S&P has soared by 69% since March, but remains -28% below its October 2007 high. Based on how the math works it actually requires a 39% gain to get back to the old high from here. While anything’s possible, we don’t view that as a high probability outcome in 2010. We believe that stocks may be able to grind somewhat higher as the economy continues to recover, but investors need to prepare for the possibility of a deeper correction as the current bull market ages.

Chart: S&P 500 Index 2007-09