The Anna Maria Island Sun Newspaper

Vol. 10 No. 17 - January 20, 2010


Anna Maria Island Sun News Story

2009: The year of the bond market

Investment Corner

Most investors are amazed at how well the stock market did in 2009 after a dismal 2008 and first three months of 2009, a period during which many thought life as we know it may be ending. Well, life isn’t ending, but will probably be changed for a good while, as investors continue assessing their ability and inclination to assume risk in the pursuit of investment returns.

Behind the relief we all feel as the extreme phase of the financial crisis fades into the sunset, there were some interesting trends within the market’s action from mid-March through Dec. 31. These trends, of course, have implications for future market action and since investment plans should be positioned for the future, investors should have some understanding of what trends may emerge next. Here’s a few statistics and observations I find interesting and worth pondering:

• Stocks had their best year since 2003. The S&P 500 Index achieved a total return (including dividends) of 26.5 percent. The MSCI EAFE Index of foreign equities provided a return of 31.8 percent, with the excess return coming from a drop in the value of the dollar versus foreign currencies.

Despite this great performance, U.S. equity mutual funds experienced net withdrawals of over $20 billion as of Nov. 11. Foreign equity funds experienced a very moderate inflow of $27 billion through Nov. 11.

The message is although equities had a great year, it does not appear the average individual investor has made the decision to move back into equities in a big way yet, as we would be able to see this in the fund flow data.

• Where did individual investors put their money? Other than the $8+ trillion sitting in CDs, savings accounts and money markets, investors seemed to like bonds. Taxable bond mutual funds received net inflows of over $240 billion, and tax-free bond funds received over $53 billion.

As usual, the early investors gained the most from the recovery in corporate and municipal bond prices. For the year, investment grade corporate bond funds gained in excess of 20 percent, and high yield bond funds (holding lower quality bonds) gained more than 50 percent on average as investors sought attractive yields in securities with a higher level of certainty than owning stocks.

While the euphoria over corporate bonds is not overdone at the moment, returns are likely to be average going forward from this point and investors should not expect a repeat of 2009’s great returns.

• Another area which individual investors are very enamored with is the emerging markets segment of international stocks. Large flows of money into these areas boosted returns to very high levels, in excess of 70 for the whole year for emerging markets equity indexes.

The emerging markets story is an exciting one to tell, but there have been a lot of exciting stories in the past, and most ended up disappointing investors who thought stock prices would “grow to the sky.” Like bonds, don’t expect a repeat of 2009’s great returns in emerging markets in 2010.

2010 may be another good year for securities investors across the board, but I believe a tempering of expectations and a sound investment plan will be important for success now that some of the easy money has been made.

Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing.

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