Market Commentary

Q4 2009: Stocks end the year with solid gains
U.S. stocks climbed higher in the final quarter of 2009 amid a growing consensus that the economy has begun to recover. Reinforcing this belief was solid growth in third-quarter GDP (gross domestic product), which reflects the total value of goods and services produced in the United States. That said, the GDP estimate was revised to a lower level twice as the quarter progressed, from 3.5% to 2.8%, and finally to 2.2%. Those revisions and some disappointing news on the housing market that came to the surface later in the quarter may have helped slow the market’s momentum from mid-November through the end of 2009.

The blue-chip Dow Jones Industrial Average^SM ended the fourth quarter with a 7.37% return and notched an 18.82% result for 2009 overall. The S&P 500^® Index, reflecting the activity of large-cap stocks, managed a 6.04% result in the fourth quarter and 26.47% for the year. The technology-laden NASDAQ Composite^® Index posted a 6.91% mark in the fourth quarter and, aided by exceptionally strong performance in previous quarters, finished the year ahead by 43.89%. The Russell 2000^® Index, which tracks the performance of small-cap stocks, tallied 3.87% for the fourth quarter and 27.17% for the year.

Held in check partly by a U.S. dollar rally in December, foreign stocks in developed markets lagged their domestic peers. Consequently, the MSCI^® EAFE^® Index returned 2.18% during the fourth quarter while managing a 31.78% mark for the calendar year. Emerging markets were led by strong results from Latin America and China, boosting the MSCI Emerging Markets Index to an 8.55% quarterly return and 78.51% for all of 2009.

Market Performance as of 12/31/09*

* Source: Morningstar Direct

Bond market returns were subdued for the most part. The growing conviction that the U.S. economy was in the early stages of a recovery, fears of an eventual rebound in inflation, and an ample supply of securities – courtesy of auctions held by the U.S. Treasury to finance the federal government’s deficit – combined to push Treasury bond yields higher and prices lower. During the quarter, the bellwether 10-year Treasury note yield increased from 3.31% to 3.85%. Rising Treasury yields created a headwind for the Barclays Capital U.S. Aggregate Bond Index, a measure of investment-grade bond performance, which returned 0.20% during the quarter and 5.93% for the year. High-yield bonds did better, buoyed by optimism about corporate earnings and easing fears about debt defaults. Consequently, the Barclays Capital U.S. Corporate High-Yield Bond Index posted a 6.19% quarterly return, outperforming the 0.09% mark of the Barclays Capital U.S. 1-3 Year Government Bond Index. For comparison purposes, 13-week Treasury bills returned 0.04% during the quarter.

Growth had the edge over value in all three of the market’s primary capitalization groups. Consequently, the large-cap Russell 1000^® Growth Index, at 7.94%, topped the 4.22% mark of the Russell 1000^® Value Index. Similarly, the Russell Midcap^® Growth Index posted a 6.69% return and outdistanced the Russell Midcap^® Value Index, which was up 5.21%. Small-cap stocks followed suit, as the Russell 2000^® Growth Index’s 4.14% mark bested the 3.63% return of the Russell 2000^® Value Index.

Nine out of 10 S&P 500 sectors finished with positive returns for the quarter. The lone exception was financials, which sustained a modest 3.68% quarterly loss but posted a respectable 14.80% return for the year overall. The strongest performance for both the quarter and the year came from information technology, at 10.45% and 59.92%, respectively. (Source for index returns: Morningstar Direct) Indexes are unmanaged, do not incur fees or expenses and cannot be purchased directly for investment.

2009: Back from the brink
The year just ended provided investors with some welcome respite from what was generally an inhospitable decade. During that 10-year span, as shown in the chart below, the S&P 500 Index declined by about 24% (price-change only, without dividends), its first losing decade in close to a century.

A lost decade for the S&P 500 Index

Chart courtesy of StockCharts.com

The year 2009’s returns were eclipsed during the decade only by 2003, another year in which stocks began a sustained rally in March amid stabilizing economic conditions. Unfortunately, the decade just ended also included two recessions, a major terrorist attack, an extended war, numerous instances of corporate malfeasance, a credit bubble, and the collapse of the housing market. Most of these developments had a negative impact on stock prices.

The average investor would have had to be a die-hard optimist to have high hopes for 2009 based on conditions early in the year. The economy was still in a virtual freefall in the aftermath of the September 2008 bankruptcy of investment bank Lehman Brothers and amid the ongoing subprime mortgage crisis. Although stock prices had suffered massive declines during 2008, they continued to fall throughout the first two months of 2009, even as the U.S. Congress passed a massive fiscal stimulus bill and the government ramped up programs with new acronyms, such as TARP (Troubled Asset Relief Program) and TALF (Term Asset-Backed Securities Loan Facility), whose purpose was to boost liquidity and restore investor confidence.

Finally, though, these Herculean efforts to halt the freefall had the desired effect. On March 10, the S&P 500 Index rose more than 40 points, a gain of more than 6%. In the days and weeks that followed, more prodigious gains were recorded. In retrospect, one particularly telling development occurred on March 23, when, at the conclusion of its March meeting, the Federal Reserve Board announced it would buy $300 billion in long-term Treasury securities in an attempt to get credit flowing more freely. Stocks responded with massive gains. Just as important, the breadth of those gains was of a magnitude rarely seen. A day when up volume is nine times as great as down volume is considered impressive. On March 23, up volume was more than 40 times greater than down volume. Another breadth indicator, the 10-day moving average of advancing issues to declining issues, topped the 2 level, indicating sustained and powerful buying that foreshadowed further sizable gains in the months to come, as the chart below depicts.

2009 ends a tough decade on a positive note

Chart courtesy of StockCharts.com

Outlook
As we look ahead to 2010 and a new decade, many questions remain. Will the economic growth that was evident in the third quarter of 2009 – which likely was largely attributable to the government’s stimulus efforts – pave the way for growth in future quarters? Will consumers, who still appear to be primarily concerned with paying down debt and building up cash reserves, be in a position to pick up the pace of their spending anytime soon? And what will happen in the housing market, which had begun to show signs of bottoming but at the end of 2009 seemed uncomfortably fragile, as highlighted by a recent report on home prices. Fortunately, investors do not need to know the answers to these questions. Their goal, as we see it, should not be to base investment decisions on predictions about the markets and the economy. In our experience, such attempts tend to backfire more often than not. Rather, we believe investors may help themselves by adopting an investment plan based on their time horizon, risk tolerance and anticipated spending needs, taking into account the long-term historical performance of various investment types. While those factors can certainly change over time, we feel they provide a much firmer basis for planning than attempts to guess at what next quarter’s economic growth will be. In closing, we would like to take this opportunity to thank our investors for their continued confidence in our services. We wish you health, happiness, and prosperity in 2010 and beyond.

The information provided is the opinion of MassMutual Retirement Services Investment Services as of 1/1/10 and is subject to change without notice. It is not to be construed as tax, legal, or investment advice. Of course, past performance does not guarantee future results.

About MassMutual
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