Don’s Outlook 2/5/2010
Although there were hints as early as December that market consolidation was looming—lower volume, narrowing trends, fewer 52-week highs—it seems uncertainty finally gripped the market and put a seal on the rally in the near term, tempering everyone’s bullish tune. Any number of traditional catalysts failed to spur bullish market action over the past three weeks, and not even lifting the cloud over Ben Bernanke’s nomination to a second term as Federal Reserve chairman was able to turn the tide. The better-than-expected and near-record-breaking gross domestic product (GDP) estimates that were released last Friday also failed to serve as a catalyst for buying. These conditions brought technicians out in force, each with a seemingly bearish view.
This week analysts seemed stuck on that old January barometer—“As January goes, so goes the market”—and whether it will cast a spell on the rest of the year. Although this was the third straight down January in a row, one need only to look at 2009, which was decidedly positive, to cast doubt on this predictor. Plus, a closer review of history provides little support for this annual bellwether, especially when the market finishes down for the month. In fact, since 1953, there have been 23 down Januarys, and these resulted in 13 negative annual returns and 10 positive annual returns, although the overall average is -4.7%. It might be more accurate to include an analysis of all midterm election years and decennial years, given that 2010 overlaps with these as well, but I think it would be wiser to assume that this year has the potential for greater volatility.
One aspect of client portfolios that continues to do well is the fixed income allocation. Although stocks and bonds have been correlated in recent years due to the extreme events within the credit markets, they are resuming their historical relationship, i.e. bonds are appreciating when stocks decline. Among the Federated bonds, Intermediate Corporate Bond (INISX), Adjustable Rate (FASSX), and High Income Bond (FHIIX) will continue to perform well, especially amid higher stock volatility. As I do, the managers of these funds hold positive outlooks on high-grade corporate, high-yield, and even Treasuries in the short term. Although rates are expected to rise, it could take longer than most investors expect.
Please note: Although the IRS is giving most custodians until mid-February to issue their tax documents, Fidelity Investments has informed us that they applied and received approval for an additional IRS extension for their own 2009 Tax Forms. Fidelity’s new deadline for providing tax information is February 28, 2010. This may not affect all account holders, but it is best to expect a possible delay. A notification letter to those customers affected by the later deadline should be sent by February 5.
