While nothing is for sure and markets will have pullbacks, there is growing consensus that 2010 could be a good year for the economy, corporate profits and the stock market. 

With two market crashes, the decade was the worst in nearly 200 years of recorded stock market history - worse than those that include the panic crashes of 1893 and 1907.  Hopefully, the market will return to its more normal historical long-term performance which excluding this decade has rewarded many investors who can weather short term declines but be focused on the long term growth potential.

"Because we just ended a particularly bad 10-year stretch, the coming decade could be more promising than normal...After the 'lost decade' of the past 10 years, don't be surprised if stocks again find their footing." (Russ Wiles, Arizona Republic 1/3/10)

The monthly payroll reports should soon show an increase in jobs, ending the current streak of 23 consecutive declines in U.S. employment.  Retail sales for the 4th quarter 2009 had the strongest increase in two years.

David Darst, Chief Investment Strategist for Morgan Stanley Smith Barney says that 2010 may be the year we start shifting from "recovery" to an "advancement" (or the economic term "expansion"). He also expects continued gains in the equity markets and emerging markets, but more losses in Treasury bonds.

In contrast to the growing optimist towards equities, the Bloomberg survey shows expectations for a decline in bond prices jumped to 76.65% - the most since the start of the survey.

Others believe earnings growth could be even better due to aggressive expense control and improved demand. Analysts with Standard and Poor's Financial Services estimate a 34.9% surge in operating earnings of the S&P500 in 2010. Those estimates work out to a price/earnings ratio of about 15, about in line with historic averages. "We're likely to see a V- shaped recovery in earnings even if U.S. growth remains subpar," said Ed Yardeni, CEO of Yardeni Research Inc. "Forty percent profit growth is realistic," he said. (Investmentnews 12/21/09)

Jeremy Siegel, the Wharton professor and Stocks for the Long Run author, thinks stocks remain undervalued and interest rates will rise sooner than many think, as the economy strengthens, which could briefly rattle the stock market. “There will be a short-term shock, as people say ‘Oh my God, the Fed is tightening so early,” he says.  “But people will see that those actions are being taken only when the economy is strong and the market will bounce back.”

Siegel says he thinks earnings growth will be stronger than expected for the S&P 500 in 2010.  He thinks earnings will then climb to record highs in 2011 or 2012. – Continued back page -

12/31/09 (MarketWatch) -- Treasury bonds will fall next year, lifting yields as the economy slowly improves, giving investors one more reason to stay away from a sector which had its biggest annual loss in three decades in 2009.

Bernard McAlinden, strategist at NCB Stockbrokers, said: "Given that we have seen strong growth in emerging economies and stabilization of the U.S. consumer, the case for expecting top-line growth for non-financials as well as financials has improved."

"This quarter we will see the first indication that the top line is improving. That more or less confirms the economy recovery," said Philippe Gijsels, a strategist at Fortis in Belgium.

For 2010, the Thomson Reuters data shows Stoxx 600 index constituents are expected to post overall earnings growth of 28.2%.

"We're still in a sweet spot with regard to earnings expectations, and economic data is surprising more on the upside than the downside," said Ad van Tiggelen, strategist at ING Investment Management, which is factoring in earnings growth of between 25% and 30% for European companies in 2010.

However a minority of analysts are not so optimistic.  "The market's very nervous. There are two strong conflicting forces. There's economic and earnings improvement and low interest rates on one side, but on the other hand there is the potential of stimulus being withdrawn," said Neil Veitch of Europe’s SVM. 

1) Recovery strategy to help maximize potential market rebound over the next few years.

2) "Participate yet Protect" strategy especially for longer term funds to protect from future market crises.

3) Pure Protection strategies such as various cash options or annuities, but not U.S. bonds due to high interest rate risk, and many are warning that bonds may be in a valuation bubble that could burst.

The three strategies can be combined within a portfolio, depending on your objectives.

²Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards