Alison
By Allison Linn Senior writer
msnbc.com
updated 12/31/2009 5:46:27 PM ET 2009-12-31T22:46:27

For investors, 2009 will go down as the year we survived the Great Recession and were able to breathe a huge sigh of relief.

After enduring a near-freefall in the early, panicky months of the year, the stock market mounted a tremendous rally in the final nine months, sending major indexes up more than 60 percent from their frightening, bear-market lows.

The Dow Jones industrial average closed the year on a losing note Thursday but still was near its highest level of the year at about 10,428, a gain of 18.8 percent over its 2008 close. That marked the best annual showing since 2003.

The stock market's surprising rally helped replenish retirement funds and investment coffers for big investment funds and millions of ordinary investors who endured a deeply painful 2008, when the stock market lost more than one-third of its value in the worst year since the Great Depression.

Still, celebrations might be muted as Wall Street wrapped its first-ever negative decade on a total-return basis, even with dividends reinvested.

The double-digit percentage gain for 2009 was especially impressive given the way the year started.

A dismal holiday shopping season, a spate of major layoffs and worries about the financial crisis sent the stock market into a tailspin in the early months of 2009. Between Jan. 2 and March 9, the Dow lost nearly 28 percent in value, hitting a low of 6,547 on March 9. That represented a loss of more than 50 percent from its peak over 14,000 in 2007.

Then, even as the recession continued to drag on the economy and the unemployment rate climbed, the Dow began clawing its way back as some investors apparently saw the light at the end of the tunnel. Moving in fits and starts, the Dow staged what would turn out to be an extensive rally, passing the 10,000 mark again on Nov. 5.

Even news on Nov. 6 that the unemployment rate had surpassed 10 percent — the highest level in more than two decades — did little to quell the stock market surge. In December the market crept up 0.8 percent.

The rally was good news for people who managed to hold on through the roller-coaster ride that began in September 2008, when Lehman Bros. filed for bankruptcy protection and Wall Street was engulfed by turmoil. Two weeks later, the Dow dropped a record 777 points after the House of Representatives failed to pass a financial bailout package.

The roiling markets were too worrisome for some, who cashed out.

Major Market Indices

“The ones that got hurt are the people that truly panicked in their investment portfolio,” said Jim Paulsen, chief investment strategist with Wells Capital Management. “If you just sat and didn’t do a darn thing, you’re basically where you were pre-Lehman.”

The stock market's rapid gains have been built in part on investors' expectations that the economy will be healthier in the coming months, and many will be looking to see those predictions met in 2010.

"For the market to continue its gains we need to see durable economic growth," John Linehan, co-head of U.S. equities for T. Rowe Price, said in the firm's 2010 outlook. "Clearly, the market’s performance in ’09 was not driven by earnings but rather by the expectation of future earnings. If those earnings don’t come through, it will be a significant headwind for the market."

Many readers predicted rally
The market's year-end result didn’t come as a surprise to many msnbc.com readers, although few could have predicted the roller-coaster ride. In a highly unscientific poll conducted a year ago, 25 percent of msnbc.com readers correctly predicted the Dow would end the year at  10,000 or above.

The largest portion of the nearly 24,000 readers who responded to the online poll, or nearly 34 percent, were more cautiously optimistic. They predicted the Dow would end the year up moderately at between 9,000 and 10,000.

About 17 percent were overly pessimistic and said the Dow would end the year at 7,400 or below. (Click in the box at right to register your prediction for 2010.)

Despite the impressive rally, many investors have reason to still feel pessimistic about their portfolios. The Dow will end 2009 below where it was a decade earlier, when the Internet bubble fueled a massive rally that pushed the Dow up at a double-digit rate for five straight years. That would be followed by years of dizzying highs and depressing lows for investors.

So what will 2010 bring?

Although many economists expect a recovery to take hold in the new year, they also believe growth will be sluggish and the high unemployment rate will continue to drag on consumer spending.

“Our most likely scenario is that … we will see good economic growth but not stellar growth,” said Sam Stovall, chief investment strategist with Standard & Poor’s Equity Research. “It will be a subpar recovery.”

Many investment experts predict the stock market gains to continue, albeit perhaps at a more modest pace. Stovall said that historically the market has typically continued to rise in the second year of a bull market recovery.

Paulsen, of Wells Capital, noted that many companies cut costs deeply in 2009 amid fears the recession would be even worse than it turned out to be, leaving them well-positioned for  recovery.

He expects to continue to see strong earnings results into 2010 as already-lean companies see improved sales.

“We are very early in this new economic recovery and that probably means that we’re still early in the market recovery,” Paulsen said.

He cautions that the stock market often recovers faster than the economy as a whole, so he doesn’t expect to see another massive rally like we saw following the low last March.

Still, he said, “I’m fairly optimistic we’re going to have another good year in the market.”

Stovall cautioned that there are many things that could still go wrong. The job market continues to be grim, and Americans are still strapped with high levels of debt. In addition, there are concerns about how well the global economy will fare.

“I’m not trying to be a Pollyanna by saying, ‘Oh, no, things are rosy and nothing bad will ever happen,’” he said.

But he noted that many of those potential economy trouble spots are well-known and have likely already been factored into Wall Street’s thinking.

By and large, msnbc.com readers seem to agree with the experts. About 35 percent of those polled so far believe the Dow will rise moderately to between 11,000 and 12,000 in the coming year, while another approximately 30 percent believe it will stay in the range of 10,000 to 11,000.

What do you think? Make your prediction here; polls will be open until Jan. 31.

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