2010 Review

I hope that your Christmas was filled with blessings and that you are safe and warm given the Christmas snow. Since this is the last week of 2010, this gives a brief review of 2010 from an Economic Business Cycle Investing perspective. The first section is the weekly recap from Vanguard.

Vanguard

With the holidays upon us, consumers are increasingly jolly with their spending, as evidenced by personal income reports. Third-quarter real GDP was revised upward again to an annualized increase of 2.6%, even as the housing industry continued to struggle and durable-goods orders fell. For the holiday-shortened week ended December 23, the S&P 500 Index rose 1.0% to 1,257 (for a year-to-date total return of about 14.9%). The yield of the 10-year U.S. Treasury note rose 8 basis points to 3.41% (for a year-to-date decrease of 44 basis points).

2010 Review

The US economy stayed in the recovery mode of the economic business cycle for the year with hints of growth toward the end of the year. As with any economic recovery, this year had some turbulence with periods of fear and jubilation creating swings in interest rates and the value of stocks.

Interest Rates: Interest rates tend to stay flat during a recovery. Looking at the entire year the interest rates have been relatively flat where the rates at the end of the year being similar to that at the beginning. So far the 10 year US Treasury rate has dropped by 0.44%, not much of a change. The interest rates did drop giving a great opportunity to refinance a mortgage. Purchasing of US Treasuries by the Federal Reserve did influence interest rates.

Stock Market: Stocks typically do well in a recovery. The S&P 500 index has risen 14.9% for the year, above the historical average. Considerable volatility did exist as a high was reached in April followed by a significant drop and ending the year at an even higher level. It kind of looked like a yoyo climbing a flight of stairs.

Employment: The employment rate normally stays relatively flat in a recovery. The key metric is hours worked per week as employers delay hiring until the growth phase of the business cycle. Next year will bring employment gains.

Commodity Prices: The price of commodities normally stay flat during a recovery and rise during the growth phase. This was true during most of the year with increasing prices toward year's end. This recent rise indicates that the economy is entering a growth phase especially if you look at the price of oil, gas, and copper. We should expect even higher commodity prices next year.

The bottom line is that 2010 acted fairly normally for the recovery phase of the economic business cycle. Commodity prices are indicating that economic growth is coming and because of this some changes will occur to investing profiles during 2011.

The next posting will give the investing gameplan for 2011. I encourage you to read it and respond if you have a question as it is important to have a common vision for the upcoming year. Also, feel free to forward it to others.