Front Range Financial Consulting

While the value of crossing market “barriers” may be more psychological than real, investors generally cheered as the Dow Jones Industrial Average (an unmanaged index of 30 widely held stocks) edged toward the 11,000 mark when the first quarter of 2010 ended. It seemed a long 18 months since the Dow last finished above 11,000 in September 2008.

“How the Market Got It’s Groove Back,” read one headline. Others marked the one-year anniversary of this recession’s apparent market low by wishing happy birthday to the “baby bull.” No one is celebrating with too much glee, but the upbeat mood among investors and most analysts is in dramatic contrast to the gloom evident when the markets closed on March 9, 2009. At the time, no one knew that would be the beginning of the recovery.

As you may know, the estate tax situation in 2010 has raised several important questions about the validity of some existing estate plans. At the moment, the estate tax itself has disappeared. It ceased to exist as of January 1, 2010, under a law written in 2001. However, as you may imagine, some apparently unintended consequences have arisen, because the very lack of limits calls into question the value of formula clauses that many estate plans and wills use to determine how an estate will be distributed. Such clauses often refer to amounts “up to the legal limit.”

As the month ended, gross domestic product calculated for the fourth quarter of 2009 showed a seasonally adjusted annual growth rate of 5.7%, Federal Reserve Chairman Ben Bernanke won confirmation to a second four-year term and the Reuters/University of Michigan consumer sentiment index rose to 74.4, its highest level since January 2008. Yet, the major financial market indices finished the month below their 2009 closing figures.

The continuing uptick in the financial market averages during the third quarter of 2009 charmed those investors and analysts who expect a new bull market to emerge from the ashes of the last. It should be pointed out that large percentage increases may look somewhat less impressive when you consider they are calculated against low points. Nevertheless, the Dow Jones Industrial Average (an unmanaged index of 30 widely held stocks) registered its best quarter since 1998 and its best third quarter in 70 years.

Possibly, only people heavily involved in the financial industry will recall September 15, 2008, as the day investment banker Lehman Brothers filed for bankruptcy. It was a powerful shock to the American financial system, coming only hours after Bank of America agreed to absorb the once-powerful Merrill Lynch – to say nothing of the disappearance of Bear Stearns into JPMorgan Chase six months before, or the Sunday morning announcement a week earlier that mortgage giants Fannie Mae and Freddie Mac were suddenly in government conservatorship. On the day Lehman Bros.

U.S. financial markets ended their best quarter in the past decade as June drew to a close, but there is enough lingering uncertainty about the state of both the American and global economies to keep caution flags flying. A disappointing consumer confidence report – having improved in May, it dropped back as the quarter ended – underscored that idea. Most analysts expect a protracted economic recovery, although numerous reports tend to show “green shoots” as signs a revival is under way.

If good news follows bad – the definition of what happens in economic recoveries – investors may take solace in the particularly dreary gross domestic product (GDP) decline of an annualized 6.1% in the first quarter of 2009. That followed a 6.3% drop in the fourth quarter of 2008. Together, they indicate that the U.S. economy is shrinking at the most rapid rate in 50 years, since a severe collapse in 1958. This is the third straight quarterly decline in GDP, a first since 1974-75

As I reflect on the current state of the US stock market, it is hard to imagine how much worse it could be. Clearly the market's response to the US government initiatives has been less than positive and ongoing concerns about the future seem to have all investors and market participants glum and worried. It seems that sentiment is as bad as it can be, yet all too often that is exactly when the bottom occurs.