Over the past year, worldwide markets continued the strong recovery that started in 2009. US stocks turned in pleasing results with investors earning significant rewards for the equity, small cap and value risk factors. But capturing the market rate of return required plenty of patience: eight months into the year, the S&P 500 Index was still down 5.8% and the tepid economic recovery appeared to put a lid on any significant upturn in prices. Nevertheless, stock prices surged over the subsequent five months and the S&P 500 ended the year at 1257.64, up 12.78% (price-only), recouping all of its losses since the collapse of Lehman Brothers on September 15, 2008.
Results were generally similar in non-US markets, with 37 out of 45 countries tracked by MSCI achieving positive returns in both local and US dollar terms. The US ranked 22nd in dollar terms and 23rd when expressed in local currency. Peru and Thailand vied for the top spot (up 53% and 56%, respectively) while Greece and Spain landed in the cellar.
Throughout the year, however, investors had no trouble finding reasons to fret about the future and remain on the sidelines:
- A prominent researcher who had predicted the Great Recession was expecting the “biggest coordinated asset bust ever.”
- An Economist cover story in January warning of asset price bubbles asserted that US stocks were “nearly 50% overvalued.”
- The “January Indicator” signaled poor stock market performance for the remainder of 2010
- A tragic drilling rig explosion in April produced a disastrous and hugely expensive oil spill in the Gulf of Mexico.
- A bewildering “flash crash” on May 6th saw the Dow Jones Industrial Average plummet over 1100 points in the course of a few frantic minutes.
- Hundreds of bank failures revealed continued weakness in the financial system.
- A divided Congress passed a complex and potentially expensive healthcare reform bill.
- Residential housing remained weak, with monthly sales of new homes falling at one point to the lowest level since tracking was initiated in 1963.
- An obscure technical indicator dubbed the “Hindenburg Omen” generated a “sell” signal in August.
- North Korea launched a deadly artillery barrage in November against South Korea’s Yeonpyeong Island.
- A financial crisis with no clear solution gripped governments in Greece, Portugal and Ireland.
Since tax time is approaching, we have included several important tax-related documents in this quarterly mailing. First, for clients who do not pay our fees from an IRA account, I have provided a report that shows the investment fees you paid in 2010. Second, for clients with taxable losses or gains in a Schwab One account, I have provided a Realized Gains and Losses report, which shows the net proceeds and cost basis for taxable securities that were sold during 2010. Make sure that you give these reports to your accountant or tax preparer. If you would like us to send these reports to your accountant, please sign the permission form that is included. Even if you signed the form in a prior year, we need a new form because of our name change in 2010.
As you read your portfolio reports, you may notice that a recently “closed” account (such as an IRA that you converted to a Roth IRA) is still listed at the bottom of your “Portfolio Holdings” report. A closed account is differentiated from open account by the “zz” before your last name. We keep closed accounts in your portfolio history because they are an important part of calculating your rate of return, as shown in your performance reports.
Finally, we want to thank all of our clients for an amazing 2010! Our transition from Keystone Financial Planning to Sparrow Wealth Management went very smoothly. It was wonderful to see so many clients and friends at the Grand Opening of our new Easton office. Also, Sparrow Wealth Management assisted our clients in converting 25 IRA accounts into Roth IRA accounts, which was quite the project! Let’s continue to work together to make 2011 another prosperous year.
Happy New Year!
About Christopher Jones
Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.
