Young and Invested

The S&P500 index has never declined in the second year of a bull market. This is applicable to all individual sectors in the S&P as well, which have never placed an overall decline in the second year of a bull market. To elaborate more on this statistic, over the last half-century, the S&P 500 gained an average of first-year bull market gains of 32%, resulting in an average second-year bull market gains of 15%.Come March 2010, we will be entering the second year of the bull market started in March 2009, and the effects of the super-meltdown that corroded many investors’ net worth will likely stand a chance of some additional portfolio recovery.

It seems the consensus of bullish investors and authors about 2010 predicts strong emerging markets, glimmering gold, weakening US dollar and weakening bonds, which portrays my outlook for 2010 precisely. Additionally, I’d like to add that in my vision of 2010:

Mr. “Rich” Consumer

Americans will continue to keep finding a way to live above their means. Recently, claims for unemployment and lay-offs have shown to decline to an 18-month low as the economy slowly recovers. This latest employment news has a double-pronged effect. First, a recently reported jump in average weekly working hours means increased income and ability to spend. Secondly, on a more aggregate level, the trend of stabilizing unemployment will improve consumer confidence of job security, a critical factor to assess consumer spending, especially for large-ticket items large cars. Together, these effects will translate into increased consumer spending in 2010.

Mr. “Rich” Consumer without a Job

On the other side of the argument, unemployment will remain relatively high around 9~10% for the entire year due to a prolonged economic recovery. Despite lower layoffs and unemployment claims, which represent incremental increases to unemployment (i.e. the number of unemployed is still increasing but at a slower rate), the overall unemployment rate will slightly decrease from current levels to about 9~10%. Although unemployment may remain high, the stabilization and slight-decrease in the unemployment levels will mildly contribute to increased consumer confidence, but will also generally improve with the economy.

Yes, More Housing

The housing market will stabilize as the S&P/Case-Shiller index has shown uninterrupted growth in price of home sales for the last 6 months; the absolute number of home sales has also increased in the same period. So, homes are being sold more often and for higher values. As shown in the graph below, the Case-Shiller index is barely at its 2003 highs, and down 32.6% from a peak in the second quarter of 2006, so I doubt that any bubble-concerns will arise as the market is still evening out.

Continuing Low Interest Rates from the Fed

Analogous to the notes above, the Fed is obviously aware that economic conditions are showing signs of recovery. The Fed was already noted to exercise some exit-strategies such as ending purchases of Long-Term Treasuries and also stated that debt purchases will significantly decrease into early 2010. But, rates were maintained near 0% during December, 2009. To raise interest rates now, when the level of economic uncertainty is still highly elevated would result in highly-detrimental effects to the economy and the Fed’s reputation – homicide and suicide. Until signs that unemployment levels have definitely peaked and positive economic indicators show long-term trends, rates will be maintained at a low level until 3-rd quarter of 2010 or early 2011.

All of the above point to a pretty good year for the equity markets. Recent analysis I’ve been seeing is consistent with this hypothesis, including increased EPS and operating profits for a majority of companies and all sectors in the S&P500. A recent Wall Street consensus expects forecasts revenue growth in 2010 to be 8%, with improved earnings as well.

I’m a firm believer that history repeats itself, leading me to believe the tradition of the S&P500 index will continue in 2010. Expect a good year for stocks coming up; we’re still about 30% from the market highs of 2007. So, stock market running out of steam? Leave that for 2011.

Disclosure: Long Market

Image Credit: pfala under a Creative Commons license

Young & Invested is THE hub for finance and investing insights from the new generation. Head to our blog for more insights! — http://youngandinvested.com

Last 3 posts by Daniel Eskin

• Short-term Versus Long-term Investments - March 16th, 2010
• Expert Interview - Puru Saxena - March 9th, 2010
• Memory of a Crisis - March 8th, 2010