Monday, January 3, 2011

Another Banner Year for Investing

From the Desk of Joe Rollins

The investment results for 2010 reflect that it was another fabulous year, although I doubt many people were anticipating those results from the way the year started. During the year, we went through tremendous political and economic changes: the stock market had already rallied close to 50% from its lows in March of 2009 before January of 2011, and we had a new Congress that was seemingly intent on overturning the capitalist system. It appeared that every headwind was fighting against a successful market.

Despite low interest rates, the real estate sector continued in doldrums; the government tried a stimulus plan that was a bona fide failure, and; the politicians in Washington could not spend money fast enough to repay political favors. From the beginning of 2010, the outlook was not very promising. With all of these negative items in the mix, who would forecast such positive results? Me!

The year 2010 is now in the books, and we all have to raise a glass of champagne to a very successful investment year. The Dow Jones Industrial Average finished 2010 with a 14.1% gain, the S&P 500 finished ahead by 15.1%, and the NASDAQ Composite finished at 18.1% higher. All three major indices had almost double-digit returns in the 4th quarter of 2010.

If you recall, 2010 was quite a rollercoaster ride. We got out of the box quickly in 2010 only to suffer through the Dow Jones “Flash Crash” on May 6, 2010. The indexes continued to deteriorate into negative territory through the summer months. In November of 2010, however, Fed Chairman Ben Bernanke announced a second round of quantitative easing (QE2) by central banks, in which the Federal Reserve would buy $600 billion of government securities to hold in their own inventory through the middle of 2011. That seemed to be the catapult that got the market going, and after that time, the S&P 500 generated a positive return of approximately 20% from mid-August through the end of the year.

We certainly endured a lot of ups and downs in the market during 2010, but if you are a regular reader of my posts, you know that I remained positive that the markets would have positive results for the year (see my “Best Investing Environment in a Decade?” post.)

As we enter 2011, I am reminded that the markets do not go up endlessly. However, there may be an opportunity in the first half of 2011 for the market to continue to appreciate. Two of my clients contacted me this morning regarding my outlook for the market in 2011. It’s a sure sign that investors are nervous when I am contacted before 9:00 a.m. on the first working day of the New Year.

One client indicated that he felt it was unlikely for the markets to continue to go up given their strong gains in 2009 and 2010 along with the extension of the low capital gains rates. Even though the changes in the tax law were not approved until late 2010, there is no question that it will benefit investors for the next two years.

The other client indicated that Congress and President Obama would unquestionably be at odds as soon as the G.O.P. newcomers convene on Wednesday. I can’t argue with that, but I do know a few things that make the prospects for investing this year better. First, it’s unusual to see interest rates remain so incredibly low. Therefore, there is a mass exodus from cash that is earning essentially zero to opportunities for higher-earning investments.

During the 4th quarter of 2010, most bond funds had a marginal or negative return. In December of 2010, the municipal bond market took it on the chin with most of the funds losing half of their year’s gains in one month. For the first time in over four years, most bond funds have experienced a negative outflow of funds, which most commentators are assuming will eventually end up in stock funds.

The fact that we are expecting gridlock in Washington is nothing but good news for investors. Some of the best financial markets we have ever had are when Congress and the President cannot come to a consensus. If you are skeptical, just look back at the years 1994 through 1999 when Bill Clinton was completely crosswise with the Republican Congress. Governmental gridlock resulted in some of the finest equity markets in recent memory. Investors should welcome and cheer for additional gridlock in Washington.

It’s difficult to forecast anything in the financial world beyond four or five months, but I currently anticipate that the financial markets will be good through the first half of 2011. It’s highly likely that by the second half of 2011, GDP growth will accelerate. If interest rates stay moderately low and there are no major world or political events, I anticipate that the financial markets will have a positive double-digits net return in 2011. That may be a bold call for the coming year, but it’s one I truly believe given the information available today. So, the sooner you contribute to your IRA, the faster you will be rewarded.

On another matter, we would like to thank all of our clients who participated in the client survey we sent out with the portfolio performance reports for the third quarter of 2010. Many survey respondents commented that our quarterly reports contain too much superfluous information. Therefore, beginning with the 4th quarter, 2010 quarterly performance reports, we will simply provide you with a summary of your net assets and remove all extraneous paper from the reports that are duplicates of what Charles Schwab & Company and Fidelity Investments are already sending on a monthly basis. If you would prefer to continue receiving this information from us, it is always available at any time on request. You will also continue receiving your monthly account statements from Charles Schwab & Company and/or Fidelity Investments in their present form.

As many of you know, 2010 marked Rollins Financial’s 20th anniversary since our firm opened in 1990. We are fortunate to have many of the same clients we had when our firm opened, and to show our appreciation, we recently sent our 20-year clients a special gift to help them ring in the New Year. We look forward to reaching the 20-year milestone anniversary with all of our clients in the years ahead, and sending a special “Cheers to the New Year” your way as a small token of our gratitude for your loyalty and trust in Rollins Financial’s services.

As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best regards,
Joe Rollins

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