Well, 2009 is done – a year in which the economy began to repair itself, a year that was very gratifying for the stock market investor.  Let’s take a look back at the last quarter in which the mood on Wall Street became increasingly optimistic.

The quarter in brief.  The rally continued, the economy showed definite signs of improvement, and the biggest health care reform in decades inched toward reality.  Stocks were hot, with the S&P 500 rising 5.49% for the quarter.¹  Commodities were even hotter.  A wave of buyers rushing to take advantage of the federal credits helped the real estate market.  World economies were growing healthier.  By the quarter’s end, even practitioners of the dismal science were largely thinking positive.

Domestic economic health.  Let’s look back at some key economic indicators during the quarter.  Consumer spending for one.  Personal spending rose 0.6% in October and 0.5% in November; personal incomes rose 0.3% for October and 0.4% for November.²  The jobless rate climbed to 10.2% for October, then declined to 10.0% with only 11,000 jobs lost in November, the tiniest payroll decline since the start of the recession.³

The key U.S. manufacturing index (the ISM) went to 55.7, 53.6 and 55.9 across October, November and December – victories three, four and five, if you will, in a five-month winning streak.⁴  Its sibling, the ISM service sector index, went from 50.6 in October to 48.7 for November (the new orders gauge come in at 55.6 and 55.1 those successive months).⁵  Durable goods orders rebounded from a 0.6% decline in October to a 0.2% gain the ensuing month.⁶

The Consumer Price Index rose 0.3% in October and advanced 0.4% for November.  For November, there was actually a year-over-year rise in CPI (+1.8%).⁷  PPI rose shockingly in November (+1.8%) after a 0.3% gain the previous month; the shock was mostly due to a 6.9% month-over-month jump in the price of energy goods.⁸

The Federal Reserve kept interest rates at record lows while dropping occasional hints that rates might necessarily rise in coming quarters.  After much contention, the House and Senate passed differing versions of health care reform legislation, with the bills yet to be reconciled as 2009 drew to a close.

Major indexes.  4Q 2009 was not as amazing for the market as the preceding quarter, but we’ll take it just the same.  The fourth quarter also brought a big descent in the CBOE VIX (the “fear index” fell 14.92%).  With a strong concluding quarter, the Dow gained 59.28% from the March 9 close to the end of the year.  The S&P 500 and  NASDAQ respectively gained 64.83% and 78.87% in the same time frame.¹

(Source: CNBC.com, ustreas.gov, 12/31/09)^1,9,10

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

Global economic health.  The data suggested a global recovery in full swing, with Asia’s economies leading the way.  By December, manufacturing indices in China, South Korea, India and Taiwan all showed growth (through Australia’s actually showed contraction).  At the quarter’s end, manufacturing in the U.K. was growing at the fastest rate in two years.¹¹

The IMF and the OECD respectively predict 3.1% and 3.4% growth for the global economy in 2010, with the bulk of emerging and developing economies heating up to 5% growth or better.  In this quarter, we learned that China’s economy grew 9.0% in 3Q 2009 as India’s economy grew 7.9%.¹²

World financial markets.  Investors cheered worldwide as stock indices made further impressive gains.  Would you have guessed the Nikkei 225 would have climbed 4.08% in the fourth quarter?  It did, and that index climbed 19.04% in 2009 – its first positive year since 2006.  Hong Kong’s Hang Seng gained 4.38% in 4Q 2009, an the Shanghai Composite advanced 17.91%.  The U.K. FTSE 100 rose 5.43%.¹³  The MCSI World Index rose 4.11% in the quarter.  The MSCI Emerging Markets Index rose 6.88%.¹⁴

Housing.  New home sales were down 11.3% for November after rising (a greatly revised) 1.8% for October; the numbers are up and down because first-time home buyers thought federal housing credits geared to help them would expire this fall.  Existing home sales rose (a revised) 9.9% for October and 7.4% for November.^15,16  Pending home sales, which had risen for nine straight months, raised eyebrows by slipping 16.0% in December.¹⁷  Housing starts reversed, diving 10.1% for October but rising 8.9% a month later.¹⁸

First quarter outlook.  For the first time in a long time, the mood is upbeat.  Many analysts think we are just two or three quarters into a U-shaped recovery that will play itself out across the next few years.  Of course, there are concerns to watch: how the Fed and the Obama administration choose to wind down the stimulus effort, when and how the Fed finally makes a move with interest rates, and the indicators in the housing market.  But barring a major geopolitical or economic event, much of the optimism (and federal support for the economy) will likely be sustained through the coming quarter and perhaps next two.  The Great Recession is slowly becoming a memory, and a classic “January effect” may kick off a fine winter on Wall Street.

18. marketwatch.com/story/housing-starts-rebound-in-nov-2009-12-16?reflink=MW_news_stmp [12/16/09]