For last year’s words belong to last year’s language
And next year’s words await another voice.
And to make an end is to make a beginning.~T.S. Eliot, “Little Gidding”
Last year I wrote about 2010 What Ifs. This was just a collection of themes or events to watch for in last year’s New Year. Now that 2010 is in the rear view mirror, let’s take a look at whether any of these issues affected the markets or our finances.
Overall, many of the themes I highlighted did come into play at some point during the year. But any negative effects were erased after Mr. Bernanke’s late August announcement that QE2 was on the way and he dropped a few hints that there was plenty more where that came from. Almost immediately, markets ignored bubbling sovereign debt problems, structural concerns ignited by the May 6th Flash Crash, and persistently high unemployment rates.
Overall, the TSX was up a little less than 14.5% on the year, while the S&P 500 increased a little more than 12.5% in 2010. Most of those gains came in the final quarter of the year, with the TSX up almost 22% from its July 5th low to the high for the year, reached on December 30th. The S&P 500 bottomed at 1010.91 on July 1st, and subsequently rallied almost 25% to reach 1262.60 on December 29th.
A year ago, I wrote that I thought that debt would be “one of the biggest factors in determining how the economy and markets perform in 2010. Consumer, business, bank and especially sovereign debt may be in the headlines a lot this year.” Indeed, the headlines were regularly sprinkled with references to debt throughout 2010.
Sovereign debt became a huge issue, especially in Europe. Greece and Ireland have already received help from their fellow Euro members, and Portugal, Spain, Italy, Hungary, Austria and Belgium may be next in line. We saw civil unrest in Greece, Ireland, and even the UK as people protested the austerity measures instituted in exchange for bailout funds.
On the personal debt front, Bank of Canada Governor Mark Carney warned repeatedly that Canadians need to get serious about lightening their debt burdens as record low interest rates won’t last forever. The savings rate in the U.S. rose a little, but many Americans still carry a great deal of debt. Housing prices failed to bounce back, leaving one of the greatest sources of balance sheet stress intact.
Bank and business debt were less of an issue thanks to FASB setting aside mark to market rules. The toxic assets are still there, but we’re pretending they’re not. Businesses benefited from easy comparisons to 2009 results and streamlined business models, which unfortunately for the unemployed, included reduced labour costs.
More Mortgage Trouble
We did see more trouble in the mortgage market in 2010, but it didn’t emanate from the source I thought it might. Rather than a flood of Option ARM resets in the States, we witnessed the emergence of yet another housing-related scandal. As a result, words like fraudclosure and robo-signers boosted our vocabulary. We have yet to see any prosecution resulting from this massive bank fraud, with authorities choosing to direct their energy toward insider trading rings instead.
Unemployment did remain stubbornly high throughout 2010, with the U.S. rate at 9.8% as of November. More jobs were shed, but there are signs that things may be stabilizing in the job market early in 2011. If the economy improves this year, we may even see some pent-up demand result in a wave of hiring. On the other hand, hiring trends will remain tepid if employers sense that any one of the economic land mines out there are going to detonate.
Commercial Real Estate
Commercial real estate activity was certainly subdued in the U.S. in 2010, but we didn’t see a crash either. Some analysts maintain that some of these loans could cause trouble in the future as commercial loans tend to carry much longer terms than residential mortgages. Still, if the economy and commercial real estate prices improve before those loans come due, we may be able to avoid a great deal of potential collateral damage.
U.S. Dollar Volatility
This went very much according to the script I laid out. The problem with these types of “scripts” is that you never know the timing. You can get the basic story right, but it may not play out in the order you anticipate. I try not to anticipate too much, if at all. When the Euro got into trouble in the spring the greenback rallied. But when Mr. Bernanke announced QE2, traders viewed that as dollar negative and piled into gold instead.
At the beginning of 2010, many felt that interest rates simply couldn’t go any lower, and advised us to prepare our investment portfolios and our personal finances for higher rates – and lower bond prices. If you look at a chart of the 10-year U.S. Treasury yield as a benchmark for interest rates, you’ll see that rates fell pretty steadily from April through October of 2010. The year wrapped up, however, with a sharp rise in yields. Experts are still debating whether this rise means that the bond vigilantes are starting to kick up a fuss about the messy U.S. fiscal situation, or that the economy is improving.
Twelve months ago I wrote that commodities would trade inversely to the U.S. dollar, as is usually the case. This inverse correlation held pretty consistently throughout the year, but you can’t escape the feeling that both traded more on the actions of the Fed than any other economic or market variable.
As difficult as it is to predict just about any market-moving variable, geopolitical risks seem even more tough to time. Terrorist attacks, Iran, North Korea, and the Israel-Palestine conflict were on the menu for potential 2010 hot spots. While all of these flared up at least a little bit throughout the year, none caused any lasting market disruptions. Even a surprise attack by North Korea near the end of the year failed to deter the bulls.
To Sum It All Up . . .
While it would be impossible to summarize the events of an entire year (especially one with as many twists and turns as 2010) in one post, we can draw a couple of conclusions from the events of the most recent 12 calendar pages:
- Uncertainties remain on many economic fronts.
- Markets remain extremely resilient in the face of these uncertainties.
- Volatility associated with the crash of 2008 has subsided, but markets are still choppy and highly sensitive to headline risk.
On Wednesday, we’ll look at some of the 2011 What Ifs that may affect your personal finances and investments.