Quote of the quarter. “Life is just a mirror, and what you see out there, you must first see inside of you.” – Wally “Famous” Amos

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 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 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 came 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 (though Australia’s actually showed contraction).¹¹ The PMIs in Europe followed suit. The Eurozone PMI was 51.2 in November and 51.6 in December. PMIs in Germany, Italy, England and France were all above 50 for December, with France’s index the highest at 54.7. At the quarter’s end, manufacturing in the U.K. was growing at the fastest rate in two years.¹²

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%.¹³

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, and the Shanghai Composite advanced 17.91%. The U.K. FTSE 100 rose 5.43%.¹⁴ The MSCI World Index rose 4.11% in the quarter. The MSCI Emerging Markets Index rose 6.88%.¹⁵