My colleagues and I have just completed our Winter 2010 Quarterly Report, a retrospective analysis of the fourth quarter and full year 2009.  In our report we observe that, even though the market began the year by continuing 2008’s dismal decline, 2009 featured great strides in the global economic recovery effort and was a good year for the stock market.  Overall, we’re left feeing optimistic for the future as several key indicators currently reveal upward trends.  The economic recovery may be slow, but it appears to be underway – and markets should benefit from the improvement.

A few highlights from the report:

–          As we predicted, the combination of fiscal stimulus and improved credit conditions boosted economic growth. The resulting increase in corporate earnings exceeded expectations and led to a surge in the U.S. stock market.

–          The S&P 500 was up 65% from its March low and 26% for the year, its best performance since 2003.  Foreign markets also soared.

–          In a reversal of the flight to safety seen in 2008, Treasurys posted their worst returns since 1973.

–          High-quality, short-duration corporate bonds rebounded nicely.  As the bonds we bought mature over the next several years, we expect to redeploy the proceeds at higher rates of return.

–          Overall, the stock market is reasonably valued, but we continue to find attractively priced shares of excellent companies.

–          While the economy is improving, there are still areas of concern, in particular high unemployment, the Fed’s ability to smoothly withdraw stimulus as the economy recovers, and conditions in the real estate markets.  The combination of these issues and the market’s rapid rise from the depths of March could lead to a temporary correction sometime during the coming year.

Overall, we conclude that economic recovery, low interest rates, and the return of money to stocks from bonds and cash holdings should result in solid stock market performance in 2010, although we do not expect a repeat of 2009’s dramatic rise.  Furthermore, a decade of poor stock market performance has historically been followed by a decade of above-average returns.  We’re not going to count our chickens before they hatch, but we are optimistic that the decade ahead will reward patient investors.

For more details of our views and outlook, including a discussion of specific stocks we’re currently buying, you can read the Quarterly Report in its entirety.

As always, feel free to contact us if you have any questions or comments.

Jordan Smyth and the Edgemoor Investment Advisors Team