Take the long view and look at 2010 as a whole now that we're near the year's end, and it looks just slightly better than average for the stock market. In 2010, in fact, investors earned a return that was clearly but not hugely above the stock market average over the last 60 years.
From 1950 through the end of December 2009, the Standard & Poor's 500 Stock Index ($INX) returned 8.71% annually on average, once you include dividends and correct for inflation.
In 2010, from the close on Dec. 31, 2009, through the close on Dec. 3, 2010, the S&P 500 was up 9.86%. Add in a dividend yield of 1.98% for the year, then subtract consumer inflation of 1.2%, and you get a return for the year of 10.64%.
So it was an above average, but nothing to rave about business-as-usual year. Must have been profitable but about as exciting as watching paint dry, no?
- From Dec. 31, 2009, to Feb. 8, 2010, the S&P 500 dropped 5.2%.
- From Feb. 8, 2010, to April 23, 2010, the S&P 500 gained 15.1%.
- From April 23, 2010, to July 2, 2010, the S&P 500 dropped 15.9%.
- From July 2, 2010, to Dec. 3, 2010, the S&P 500 gained 19.8%.
All told, 2010 has been -- what shall I say? -- volatile.
Why we're on a roller coaster
Any investor who hasn't retreated to a bunker until it's all over can recite the news items that have driven this stock market year.- The Greek debt crisis and the solution to the Greek debt crisis.
- The Chinese growth scare and fears over monetary tightening, and the relief when that fear of monetary tightening turned out to be less than expected and ineffective.
- Optimism that the Great Recession was over, followed by fears that the United States would drop back into a double-dip recession, followed by relief that the economy was growing again -- at any speed.
- The Irish debt crisis (and the return of the Greek debt crisis), and the solution to the Irish debt crisis.
You could stop your analysis of the stock market in 2010 right there. Stock prices were volatile because we had such volatile financial news (and I've left out things like the Federal Reserve's decision to dump $600 billion on global financial markets in a program of buying Treasurys, an effort known as quantitative easing and christened QE2, perhaps because it's so hard to steer).
But I think it's worth taking the explanation one step deeper and asking, "Why was 2010 so full of volatile financial news?" Ask that question, and we've got some hope of figuring out if 2011 will feel like another year of earthquakes or turn into a year of gentle zephyrs wafting through the flowers.
I'd argue investors should get ready for another year of volatility -- because 2010 was just part of a wrenching process of adjustment in the global economy so large that there's no way it gets done in just a year.
Let me just run through a few of the changes that drove the volatility in 2010 -- and are likely to drive more volatility in 2011.
Credit where credit is due
First, we're seeing a relative decline in the creditworthiness of the developed economies. From Japan to Italy to the United Kingdom to the United States (with a detour for Germany, perhaps), developed countries face such massive mountains of debt that it is by no means certain that they can ever repay the loans. (In fact it is absolutely certain that the weaker among these developed economies will not be able to repay and will have to "restructure." Which is the polite word for default. Right now, the conventional wisdom is that countries don't go bankrupt -- except that history is full of examples of countries doing just that.)For the developed economies, we've just seen the start of a trend toward lower credit ratings, higher interest rates, slower growth and weaker currencies.
On the other side of the seesaw, we're seeing a relative improvement in the creditworthiness of the developing economies. China sits on the largest foreign-exchange reserves in the world, but we're also seeing investment-grade credit ratings going to countries such as Brazil, Indonesia and Turkey for the first time. Just the other afternoon, I got news of credit upgrades for Bolivia and Paraguay.
For the developing economies, we've just seen the start of a trend toward higher credit ratings, lower interest rates, faster growth and stronger currencies.
No investor should underestimate the extent of the effect of these changes. About a month ago, one of the folks who does trading for my Jubak Global Equity Fund (JUBAX) told me that friends of his back in Brazil were able to get 30-year home mortgages for the first time. Up until this year, inflation had been so high and interest rates so unpredictable that the 30-year mortgage, that bread-and-butter product of the U.S. financial system, wasn't viable in Brazil.
The reverse is happening in developed economies. No, I don't mean that the 30-year mortgage is about to go away. But credit is getting tougher to get, and banks that need to either raise capital or cut back on the risk in their portfolios are choosing to cut back on risk.
Continued: New world for investors
