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Originally published January 1, 2010 at 12:04 AM | Page modified January 1, 2010 at 11:43 PM

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Markets

Stocks rebound for a stellar year

A lot of people are nursing hangovers today after New Year's Eve revelry. But in the stock market last year, the party came after the pain.

Seattle Times business reporter

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A lot of people are nursing hangovers today after New Year's Eve revelry. But in the stock market last year, the party came after the pain.

After a six-month plunge — the benchmark Standard & Poor's 500 index lost 46 percent between mid-September 2008 and the bottom on March 9 — U.S. stocks rallied to chart one of their best years ever.

"If you look at it from the bottom in March, it was a spectacular year," said David Francis, head of equity investments for Minneapolis-based Thrivent Financial.

The Dow Jones industrials gained 18.8 percent last year; the broader S&P 500, generally considered a better stock-market gauge, jumped 23.5 percent.

Both of those indexes were left in the dust by the Nasdaq composite: That technology-heavy index soared nearly 44 percent last year.

Those robust gains, of course, followed big losses in 2008. The S&P, for instance, has only climbed back to where it was in early October 2008, and remains far below its all-time high of 1,565.15, set on Oct. 9, 2007. (Looked at another way, the S&P is now just about where it was in the spring of 1998.)

And a weak final trading day suggested that traders — the few of them who showed up for work Thursday, at any rate — still harbor doubts about whether the economic recovery can sustain itself without government support.

"Investors are taking a breath and waiting for confirmation that the moves they've seen in the market so far are justified," said Lawrence Creatura, vice president and portfolio manager at Federated Clover Investment Advisors.

As they typically do toward the end of a recession, Creatura said, stocks last year moved up "well in advance of any economic evidence whatsoever. The evidence to support those moves is only just now starting to come out."

One piece of evidence: The Labor Department reported Thursday that weekly unemployment claims had fallen to their lowest level since July 2008.

Holiday retail sales seem to have come in stronger than many expected, and consumers' expectations — though not their feelings about current conditions — have risen.

Rob Haworth, regional investment manager in Seattle for U.S. Bank's Private Client Reserve, said markets have been lifted not by any one big development, but by a succession of indications that the recovery is gaining traction.

"It's bits and bites here and there," Haworth said. "What it's going to take to really get this recovery on track is employment."

But, he added, most of the buying action pushing stocks higher has come from mutual funds and other institutional investors, rather than individuals.

"This is one of the few rallies we've seen where individuals have been selling the whole way up and buying bonds," he said. "You usually expect retail investors to chase the trend, which has been up, but they're still chasing last year's trend."

Most, but not all, industrial sectors gained ground last year — including some, like autos, that were all but left for dead in 2008. Other winners, such as forest products, computers, software, energy and metals, were bought by investors expecting them to benefit from a global recovery.

Many of the lagging sectors, by contrast, are still coping with fallout from the real-estate bust — banks, builders and suppliers of construction materials.

Northwest stocks tracked some of those national trends. The best-performing Northwest stock last year was Boise Inc., the Idaho-based paper and packaging company. It soared more than 1,100 percent, from 43 cents to $5.31. Clearwater Paper wasn't far beyond, rising 555 percent.

And as commercial banks were the second-worst performing sector nationally, 16 of the 20 worst-performing Northwest stocks in 2009 were banks.

In other cases, Northwest companies beat the trend. Biotechnology was a losing sector nationally, but four of the region's 10 best performers were small biotechs.

The ranks of Northwest public companies continued to shrink in 2009, as they have for years. At the start of the 2000s, nearly 200 Northwest-based stocks traded on major exchanges; now there are just 134, and several of those have received delisting warnings.

Last year three local names went bankrupt: Eddie Bauer Holdings, Monaco Coach and WSB Financial, the parent of Bremerton-based Westsound Bank. WSB's bankruptcy followed the bank's failure in May; Bellevue-based Eddie Bauer was sold to a private-equity firm; while Oregon's Monaco sold most of its assets to Navistar International.

Two small biomedical companies, Woodinville-based Eden Bioscience and Seattle's Northstar Neuroscience, voluntarily liquidated themselves over the summer. Both had struggled for years. Loud Technologies, the Woodinville sound-equipment maker formerly known as Mackie Designs, was delisted in March.

In a slow year for mergers and acquisitions, just two Northwest public companies were bought. Puget Energy was sold to a consortium led by Australia's Macquarie Group; Oregon-based InFocus was bought by Image Holdings.

Looking ahead, several market watchers reached beyond the alphabet to describe the outlook for 2010. Rather than a U-, V- or W-shaped recovery, they said, the coming year may look most like a square-root symbol: a steep decline, a sharp bounce back and then a flattening.

Thrivent's Francis said he expects the first couple of quarters of 2010 to be fairly strong, with 4 or 5 percent growth in gross domestic product. But those growth rates likely will taper off as the year progresses, to around 3 percent.

Inflation should remain low, meaning the Federal Reserve can afford to not raise short-term interest rates. But the course of the recovery largely will depend on how and when the Fed and the Treasury Department start removing the financial props they rushed into place in late 2008 and early 2009.

"Nobody's expecting them to tap the brake" in 2010, Francis said. "The real debate is about when they're going to start easing off the gas."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

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