Don’s Outlook 1/8/2010
It is nice to begin the year with accolades, so I appreciate the fact that this week Mark Hulbert recognized the long-term track record established by my flagship newsletter, the Fidelity Independent Adviser. For more than 10 years, The Hulbert Financial Digest has independently tracked those model portfolios and has the unique ability to verify the results and compare them to hundreds of other advisers. The Fidelity Independent Adviser was one of seven to pass his criteria for risk-adjusted returns for several periods over the past 10 years. If you would like to read the article, please click here to visit the Barron’s web site.
Stocks launched 2010 decidedly into positive territory, shaking off their year-end stupor with conviction. After meandering through two holiday-shortened weeks of light trading, which nevertheless pulled stocks slowly higher, Monday’s action was much more reminiscent of the trading that had carried most assets well off their 2009 lows. All fingers pointed at the weakening U.S. dollar as the chief culprit. The greenback resumed its inverse relationship with most asset classes, including commodities, which were up across the board yesterday.
Gold and oil stole the headlines within the commodity markets. Most analysts and investors were looking for signs that the inflation trade was back on. Although the appetite for risk declined toward the end of December, it remains at extreme levels not seen since 2006 and 2007, which was during the heart of the last bull-market run. Moreover, the trends look set to continue if these assets can reach new highs. Last weekend Federal officials reiterated their desire to see interest rates remain low for an extended period of time.
Gold corrected more than 10% from its peak levels in December, and could once again offer favorable risk-adjusted returns. The metal has not yet reached extreme levels relative to other commodities, such as oil, or even stocks. One only needs to look back to the first quarter of 2009, when an ounce of gold bought 25 barrels of oil, compared to today’s 14 barrels. For its part, oil appears to have stabilized and is again moving beyond $80 per barrel. The onset of colder weather and larger-than-expected drawdowns has provided the right mix of news to send prices higher. If the Organization of Petroleum Exporting Countries (OPEC) can stick to their agreed-upon production levels, or if emerging market demand materializes anew, the price of oil could catapult toward $90 per barrel in the near term.
One struggle that has yet to reconcile itself completely is the relative strength of growth investing over value investing. After significant outperformance by value-style investing from the 2000 peak through 2006, growth resumed its leadership role in 2007. The defensive names typically associated with value investing began to appreciate toward the tail end of 2009, but growth looks set to regain the lead in 2010.
With the start of the new year, all eyes are on the first week, and the often-referenced “January effect.” This is the notion that the outcome of the first five trading days determines the direction of the entire year. While a positive first-five trading days may give the year a statistical edge, the rest of the month will be just as important this year, as investors assess whether last year’s trends will dominate the first half of 2010.
