Spectrum Advisors Newsletter January 2010

Where do we go from here?

That is the question that economists and investors are asking themselves daily. After the near-meltdown that began in autumn of 2008 and extended into March of 2009, the markets have rallied strongly! Posted 2009 gains in the domestic S&P 500 index were over 26% and in the NASDAQ 100 index exceeded 50%!! The international markets also fared well with the EAFE up over 30% for the year and the emerging markets index up a whopping 80%!!! So what does 2010 hold in store- for the economy and for the markets?

We expect to see a continuing recovery in the economy in 2010. While we have yet to see sustained growth in the number of new jobs being created, job losses have slowed dramatically. Employers have seen profits on the rise, in part fueled by the increased productivity of a diminished workforce. However, with continued improvement in consumer confidence and ongoing government stimulus, our best guess is that employers will begin to add jobs during the first quarter of 2010. The housing market also appears to be nearing a bottom, if it has not already bottomed, with inventories of new and existing homes continuing to decline.

Our best guess is that the "easy money" has been made at this point. It has been our view that as the "risk aversion hysteria" that took hold after the collapse of Lehman Brothers in autumn 2008 subsided, the markets would quickly find their way back to "pre-Lehman" levels. We are within striking distance of those levels on the major indexes today. We now believe that the growth rate of the market will moderate significantly from the pace of the last 10 months of 2009, and will be driven primarily by corporate earnings and market fundamentals. The long term average annualized return for the S&P 500 has been a nominal 9.79% (Ibbotson, PNC), and the consensus of market prognosticators is for 2010 to produce an average return. This being said, there remain a number of risks to the market’s continued recovery: inflation, the burgeoning national debt, the probability of future tax increases, the impact of current health care and environmental legislation, and the threat of a new terror attack. We need to be cautiously optimistic.

As the markets have allowed all of us who remained invested an opportunity to recapture much of the losses of 2008, we are afforded an opportunity to revisit our appetite for risk and the alternatives to the traditional market-based investments as a means of adding non-correlated diversification. Our clients that have embraced our recommendations in this area have enjoyed the peace of mind and competitive returns that these market alternatives provide. We are also advocating the addition of a tactical, market timing model to compliment our strategic, buy and hold approach. Please do not hesitate to contact us should you wish to revisit your risk tolerance and/or these market alternatives.

We remain committed to be diligent in monitoring the investment landscape and to seek out alternative techniques and products that can mitigate risk while producing competitive returns for you, our clients.

Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/ SIPC Headquartered at 18 Corporate Woods Blvd., Albany NY 12211