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Market Insights - January 2011

Almost every asset class turned in a strong performance in 2010. Bedminster Group clients enjoyed a
second year of recovery and growth in their portfolios, despite a great deal of uncertainty along the way.

Markets rallied strongly during the first four months of the year, despite a slump in mid February as the European debt crisis first surfaced. Then the not so merry month of May.  US equity markets experienced the infamous "Flash Crash," Greek workers rioted in the streets of Athens, leading economic indicators turned down sharply, and concerns about the global recovery and stability of the Euro more than erased all gains; stocks ended the first half of the year firmly in correction territory (see chart below.) Then, as so frequently happens, markets began to turn at the most unlikely time.  Congress finally approved financial overhaul legislation, BP capped the gulf oil well spill, and meager investor expectations set the stage for a strong rally.

  

   Stocks and real estate sectors, 2010

 

The numbers

The Dow gained 11% in 2010 closing at 11,577, while the S&P 500 rose 12.8% to 1,257. Gold continued to glister, gaining 29.8% to close at $1,421 per ounce. Smaller stocks, measured by the Russell 2000, added 26.8% in 2010. Global markets surged as well; the MSCI Emerging Markets index, measured by the exchange traded fund EEM, gained 14.8% for the year, although the Developed Markets index, EFA, gained a mere 5.3%, weighed down by concerns over the euro.  Real estate, measured by the Cohen & Steers Realty fund, ICF, rose 25.1%. Bonds also rallied strongly in 2010, moving in tandem with stocks for most of the year, although a year end sell-off dampened returns slightly. The Barclays intermediate term Treasury bond index was up 5.29%, the Barclays AA rated corporate bond index gained 7.1%, and the Barclays muni bond index gained 2.1%.

U.S. and global consumers began to spend and invest again this year, and the strong recovery in developing markets that began in 2009 continued to gain momentum in 2010. Investors took their cue from strong and coordinated central bank stimulus and debt support; markets became convinced that it was within the global financial system’s capability to fine tune recovering economies and avoid a second recession. The US economy benefited from a massive round of quantitative easing in August, and another quasi-stimulus in December as a tax compromise came together, both of which added to the markets' momentum. Employment, which showed ominous signs of regressing in the summer, came together strongly over the final quarter of the year; as new unemployment claims began falling and job creation ramped up.

Even though we continue, on balance, to be constructive on the equity portion of your portfolio this year, we will be increasingly cautious moving forward.  Stock markets fell very far when the recession began, and, in retrospect, were discounting a total economic collapse. We have rebounded a long way from the lows of March 2009. That momentum has been a key driver of return over the past two years; without it markets in 2011 will be more volatile, less forgiving of disappointing news, and more challenging.  The pluses we see going forward are easing business credit, slowly strengthening job creation, an increase in mergers and acquisitions activity, stronger consumer spending and tax stability for 2011 and 2012. The negatives; an ailing residential real estate market and diminished consumer balance sheets, continuing liquidity problems in the Euro zone, weakness in state and local finance, and an overbought bond market. Investor sentiment is quite good now, and the flow of funds out of stock investments into bonds reversed itself for the first time in many months in December. We are all feeling a little more optimistic, and this is always cause for concern.

 

Steven I Weber, Investment Officer

The Bedminster Group

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