Despite ghastly start, stocks finish 2009 with strong gains

By Tomoeh Murakami Tse
Washington Post Staff Writer
Friday, January 1, 2010; A12

NEW YORK -- U.S. stocks ended a mercurial year with a nearly 24 percent gain, rebounding from the biggest loss since the Great Depression with a rally many investors had not seen in their lifetime.

The past year started in the depths of the financial crisis, with looming fears of a global recession and a financial system on the brink. By March 9, the Standard & Poor's 500-stock index had tumbled 57 percent from an October 2007 high, the worst fall since 1932.

But then the crisis ebbed and a rally was born. Stocks soared 65 percent and by the end of the year, the market had gained back half of its losses from the financial collapse.

When the closing bell rang Thursday on the floor of the New York Stock Exchange, the S&P 500 index, in many ways the most important of the major indicators because it includes a broader range of stocks, stood at 1115.10, up 23.5 percent for the year.

The index is still off 29 percent from its record in October 2007 and finished down 24 percent for the decade. It was the first decade in which the index posted a negative return for investors, whose returns fell about 9 percent after dividends, according to Standard & Poor's.

The Dow Jones industrial average of 30 blue-chip stocks ended up 18.8 percent for the year but down 9 percent for the decade. Likewise, the tech-heavy Nasdaq composite index closed up 43.9 percent for the year but down 44 percent for the decade.

Leading the 2009 rally were shares in the information technology sector, which rose 60 percent for the year. Many institutional investors are betting they will see profits with companies replacing years-old computer systems amid signs of an economic recovery.

Shares in the materials sector rose 45 percent, while stocks of companies selling consumer discretionary goods rallied 39 percent.

Financial shares also rallied, finishing up 15 percent for the year. Bank of America, which returned billions in government bailout funds last month, saw its stock price more than quadruple since its March lows.

Many small investors who saw their retirement accounts sink appear to have sat out the rally, instead putting their money in less-risky bond funds. Investors pulled $4 billion out of mutual funds that invest in stocks during the first 11 months of the year, according to the Investment Company Institute. Meanwhile, bond mutual funds took in $349 billion during the same period.

Analysts are divided over what 2010 will bring.

The optimists say 2009 marks just the beginning of a prosperous bull market, with the economy growing once again, albeit modestly, unemployment beginning to peak, and companies starting to beat Wall Street analysts' tamed expectations. These investors also note that many companies and consumers are sitting on piles of cash -- money that could be spent on investments.

"I think we're on a roll -- we're still fairly early in the upturn," said Mark A. Coffelt, chief investment officer of Empiric Funds, adding that stocks could rise another 15 percent over the coming months. "I would expect at least the first half of next year to be a good year."

The bears say the economy is still vulnerable, supported by government spending and dragged down by a high number of out-of-work Americans. Weakness in housing remains a concern, they say, while the resurgent financial sector could be hit by another crisis, this time in commercial mortgages, whose default rates have been rising. Some investors are also concerned with the impact of increased government spending and what it may do to prices and borrowing costs.

Others note that stocks are already pricey, with many fund managers ready to pull out money at the first sign of weakness.

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