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2010: S&P 500 INDEX

12/15/2009

Heading into 2010, we must give pause to the strikingly similar price action of 2009 to 2003.

2003

Source: Bloomberg

2009

Source: Bloomberg

Clearly market patterns do repeat themselves as people panic and react the same way throughout the history of our markets. Lightning generally does not strike twice, so the basic assumption that 2010 will equal 2004 might be more difficult to achieve. However, the capital markets-friendly environment of low interest rates will remain in place during 2010, just as it did in 2004. Equally similar expectations point toward a decrease in volatility, as occurred in 2004. Corporate Bonds historically perform very well in a decreasing volatility environment. I will provide some Corporate Bond specific commentary in the coming weeks, ahead of 2010.

2004 SPX VOLATILITY INDEX

Source: Bloomberg

I project a transition within the marketplace as we head into 2010. The "CYCLICAL RECOVERY" should begin to transition into a 'QUALITY RECOVERY." My expectation is that bottom line execution begins to translate into top line sales growth. Forgive me for referring back to 2004 again, but once a recovery is underway and the expectations shift toward top line beats, the reaction to quarterly earnings is highly critical.

I expect supportive earnings for Q4 2009 to be reported during the mid-January 2010 period. Strong Q4 results along with significant beginning of the year "money flow" should keep the Capital Markets recovery in an upward path during January and February.

The pressure will build in mid-April as Q1 2010 results are released. Investors need to be cautious during Q1 and Q2 earnings periods next year as a dramatic shift toward high expectations will present an "overhang" to those releases. In fact, a phenomenon I call "Earnings Exuberance Exhaustion" challenges those two earnings periods.

Earnings Exuberance Exhaustion Q1 Earnings 2004

Source: Bloomberg

However, similar to 2004 investors should remain committed to their 2010 investment plan as I expect an eventual end of year "election relief" rally to surface and reward those who remained after a "baseball season" of frustration for the Capital Markets.

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.