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2010 Recap
Published: 12/2010

It is time to reflect on the recovery, the markets over the past year, and what we may see in 2011.

The dislocation of the markets was as abrupt and alarming as any we have experience in the past 75 years. The recovery though has been very uneven: swift and positive for stocks, horrible for housing and employment. The old saw is a rising tide lifts all boats yet the tide is different in every harbor. Much of the economy continues to struggle with a gross over supply of housing and a dearth on new jobs. However, many businesses, especially large, publically held companies are doing very well. Consequently they are posting nice profits and showing rising stock prices. I believe that is what fueled the market gains in 2010.

Fixed income was a different story. The Federal Reserve tried mightily to keep short rates near zero to prevent deflation. They pumped massive reserves into the banking system whether it wanted them or not. Why did they continue this exercise even while a recovery appeared? Because as Japan can attest, deflation is a much more intractable problem than inflation. Paul Volker cured very high inflation in the early 80’s although he did lose a few patients. Nonetheless, by the fourth quarter medium and longer rates could no longer be contained and jumped to more normal levels. Some may view higher rates as a headwind to business; others may argue that it entices more investors and generates more capital for growth. In either scenario, short rates are too low and mid to long rates are close to acceptable levels.

Consequently stocks did well for all portfolios in 2010 especially domestic shares while fixed income instruments ended up giving back some of their early gains. Foreign stocks were mixed with emerging markets doing very well while European markets struggled with severe debt problems. They are learning a painful lesson that sharing a currency is easier than sharing a fiscal policy.

Going forward, I am maintaining my overriding theme: stay diversified and keep your bets limited. Nobody knows where any of the markets will be on December 31, 2011 although there is no shortage of pundits willing to make a prognostication. However, it is impossible not to have some bias for certain sectors. My leanings are to equities both domestic and foreign and away from bonds especially munis. This doesn’t mean there will not be any fixed income in your accounts just less than normal depending on your particular situation.

My biggest fear going into 2011 is that China slows more than anticipated and hurts growth worldwide. This would impair our growth as well as other economies as most developed countries export a great deal to China. Crises that no one could foretell will emerge this year as everyone’s crystal ball has a few smudges on it. That is why we diversify and never go all in.


Marty Gallagher

Written by: Marty Gallagher

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