DECEMBER 31, 2009.2009: Banner Year for Stocks



Rise of 61% From March Trough Among Fastest Ever; Mom & Pop Investors Still Wary







By JOANNA SLATER



The U.S. stock market is poised to end the year with a comeback of historic proportions, with the Dow Jones Industrial Average up 61% from its March nadir and 20% on the year.



And this market move has been missed by many, many small investors.



But the history of such comebacks suggests the biggest gains may already be over, making it hard to expect a blockbuster 2010.



With one trading day remaining in 2009, the Dow is on track for its biggest annual gain since 2003, when it rose 25%. It finished Wednesday up 3.1 points, at 10548.51, a fresh peak for the year and the highest since October 2008.



The Nasdaq Composite Index and the Standard & Poor’s 500 stock index are also set to notch their largest yearly increases, percentage-wise, in six years.



A slew of industries and companies that had been slumping – from automobiles to financials to media – have seen hefty bounces in their stocks. Shares of Ford Motor Co. have more than quadrupled in value in 2009, while those of American Express Co. more than doubled. Gannett Co., a newspaper publisher, has seen its stock increase by 88%.



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.Many mom-and-pop investors, who were badly burned by the stock-market collapse, remain wary. As of the end of November, stock mutual funds had suffered an outflow this year of $4 billion, according to the Investment Company Institute. By contrast, there have been inflows of $284 billion into taxable-bond mutual funds, considered a safer bet.



Ed Kaniewski, 60 years old, has some concerns about stocks’ recent run. A retired real-estate lawyer in Rochelle Park, N.J., he keeps only about one-third of his portfolio in stocks, and he is hesitant to wade in deeper. The U.S. market “is a little bit ahead of itself this year,” he says, given the economic problems that remain. He wishes he had bought an emerging-market stock exchange-traded fund earlier this year, but now, “you have to wonder if things are overpriced,” he says.



History suggests that the biggest gains could already be in the rearview mirror.



“Nine months ago, investors had to make a very big leap of faith,” says Hasan Tevfik, a global-stock strategist at Citigroup in London. "Now investors have to make maybe a smaller leap of faith, so you’re not going to be rewarded the way you were back then."



Early in the rally, the gains were fueled by the realization that the financial system and the economy would escape total meltdown. But then signs of an improving economy and company earnings that consistently bettered expectations took hold, helping drive market gains.



The biggest worry for many investors is whether the rise in stocks reflects an overly optimistic view of what lies ahead for the economy.



For the stock rally to endure, investors say, the U.S. economy must avoid slipping back into recession – a “double-dip” scenario – and start adding jobs. Companies also will need to deliver earnings fueled by better sales, rather than by the aggressive cost-cutting that many undertook in 2009.



Some investors worry that the Dow, with its rapid climb following a precipitous fall, is following patterns seen in the 1930s and 1970s. In those periods, stocks staged robust rallies, only to lose most of those gains and spend years going nowhere.



The Dow rose 48% from 1929 to 1930, then plunged 86% over the next two years. In 1933, the index shot up 64% over 53 trading days. But stocks went on to bounce up and down for years, with sharp gains and declines.



After a major slump in 1973 and 1974, stocks began a rally that lasted almost two years. But the market subsequently gave back most of those gains.



These days, investors remain jittery enough that bad corporate news can spark market volatility.



“The burden of proof is higher, so we’re going to get punished for every bad number that comes out – and there will be bad numbers,” says Uri Landesman of ING Investment Management.



Some investors say the light volume associated with the recent rally and the lack of money flowing into stock mutual funds are evidence that many investors haven’t participated.



By contrast, money pouring into bond funds helped spur a rally in high-yield corporate bonds, which have gained more than 50%, according to a Merrill Lynch Bank of America index.



World-wide stock markets also joined the surge. Global shares are heading for their best annual performance in six years. Standouts include Brazil and Russia, where stocks suffered mightily in the crisis but whose benchmark indexes this year are up 82% and 125%, respectively.



This year’s rising tide has lifted some ships higher than others. Globally, stocks in sectors like materials and information technology have risen more than 50%, according to indexes from MSCI Inc. The laggards include utilities and telecommunications, up about 6% and 12% respectively, according to MSCI.



In geographical terms, the biggest gains have come in emerging markets like Brazil, Russia, China and India. Still, those markets remain well off their all-time highs, touched in 2008 or earlier.



For U.S. investors, a falling dollar in the latter part of 2009 has further sweetened returns on international shares, since profits in foreign currencies are pumped up when translated back into dollars.



This year’s strong rally would appear to vindicate those who suggested early in the year that stocks were a major bargain. Less than a week after the Dow touched a 12-year low in March, Larry Summers, President Obama’s economic adviser, noted in a speech that stock prices, adjusted for inflation, "may be regarded by some as the sale of the century."



At that time, investors weren’t exactly convinced.



One of Herbert Hoover’s economic advisers could have made a similar statement back in 1931, just ahead of further brutal declines in the stock market, wrote William Sterling, chief investment officer of Trilogy Investment Advisors, at the end of March.



Still, he urged clients to take heart. “These are not the 1930s!” he wrote.



—Eleanor Laise and Matt Phillips contributed to this article.