Thought of the Day
“In All, a Pretty Good Year”December 31, 2010
January and December, the alpha and omega of the year, were apart not only in distance, but in performance and volatility. January, while starting strong – up 156 points on the first day – finished the month down 3.5%. On seven of the nineteen trading days in January the market traded up or down more than 100 points. December also started strong – up 249 points the first day and 106 the second day – but then just drifted higher, providing the longest period of the year – nineteen days – in which the DJIA’s performance did not go up or down more than 50 basis points. Barring some unforeseen event today, the month should finish up about 5.3% and the year, as measured by the S&P 500, up about 13%. Incidentally, with the Russell 2000 up 26.4%, the gap between the performance of small cap stocks versus large cap ones is the largest since 2001, according to today’s Wall Street Journal.
Volatility continues to ebb. When one looks at a three year chart of the VIX, the graph looks like an EKG of a man who had a sudden scare, which was a true reflection of the panic we all had when in late September-early October 2008, it appeared the financial system might collapse. We had another fright on May 6 when the “flash crash” caused the VIX to spike from 19.61 to 40.95. The VIX should end the year about 18% below where it began. Other than May and early June, daily volatility, as measured by the DJIA trading up or down more than 1.5%, continues to modestly moderate.
Other than small cap stocks, commodities, as measured by the CRB Index, with a 15% gain outperformed stocks, led by silver up 81%, copper up 32%, corn up 49% and wheat up 44%. Those price increases are bound to impact consumer prices in 2011. Bond prices generally rallied in the first half and fell off in the second. While it is my sense we have seen the peak in Treasury prices, I worry about stagflation; I fear the retardant and inflationary pressures of too much state debt in developed nations and continued demand for commodities from developing countries.
The expectations of a “new normal”, with its low investment returns, may still prove true, but for the nonce we should be thankful that the crisis of two years ago grows more distant by the day; however, we should never forget the lessons that led us, individually, corporately and government-wise, to that precarious situation. Thrift should replace profligacy; commonsense should substitute for foolishness and independence is a better alternative than dependency.
As in every year, there were times of joy and moments of sadness. Regardless of what the markets bring us in 2011, I wish you health and happiness in the New Year. As you stand tonight singing “Auld Lang Syne,” tossing out the old and welcoming in the new, keep in mind that while the words speak of long ago times that should not be forgotten, the last stanza speaks of giving a hand, “my trusty fiere” (friend), and asking for one in return. The words return us to the present and remind us of the value of family and friends today – of giving and receiving. I thank you all for your friendship and wish you a healthy, happy and prosperous New Year!