World stocks started the year with strong, broad gains to new highs on Monday amid growing investor confidence in the global economic recovery. Since then, the markets have mostly inched ahead.
January's stock-market performance is seen as a key indicator for the year. And the first week, to a lesser extent, is considered a barometer for January. Over the last 110 years, an up January for the Dow Jones industrial average has led to a median 10.4 gain for the year, while a negative January has ended with just a 0.3 percent gain. January was weak in both 2008, a terrible year for stocks; and 2009, which saw a sharp plunge until early March before a dramatic rebound.
The market averages are still well below their 2007 highs. With the economy and corporate profits in the early stages of recovery, we think there's plenty of room for investment gains over time. But the advance since last March has been mostly uninterrupted, and that much-discussed, long-overdue correction of 10 percent or more has yet to happen.
Among the challenges the markets will face in 2010 is rising interest rates. Of course, rising rates aren't all bad this time around because they should at least partly reflect an improving economy. Long-term Treasury bond yields are already climbing, although they're still low. Short-term rates, controlled by the Federal Reserve and now basically at zero, will go higher eventually.
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