Stock and bond markets diverged this quarter bringing an end to the impressive rally in the equity markets. During the quarter the S&P 500 declined 11.4% making the year to date loss 6.7%. International stocks fared slightly worse declining 12.2% during the quarter and 10.8% for the year. Small and Mid Cap stocks did slightly better with both the Russell Midcap and 2000 indices down nearly 10% for the quarter and 2% for the year. Bonds were up 3.5% and 5.3% for the quarter and year to date periods respectively as measured by the Barclays Aggregate index. The HFRX Global Hedge Fund index was down 1.2% for the year.

The current equity rally has now crossed the year mark and has continued to show impressive strength. TheS&P 500 is off to a terrific start gaining over 5% during the first quarter. International stocks as measured by the MSCI EAFE index lagged the US markets but were up about 1%. The Barclays Aggregate bond index was up almost 2%. The markets continue to humble us as we wrote only three months ago that returns were going to be more challenging in 2010. So far, returns are plentiful as the bull market recovery marches on. We will see what the rest of the year has in store for the markets.

After a dismal 2008 that bordered on tragic, 2009 was a year of recovery and what a recovery it was in terms of asset prices. Bonds and stocks surged after March 9th and have generated one of the strongest market rallies in history. We were not surprised by the direction of the market this year but the absolute returns were surprising due to what we believe is a recovery that has not oven itself to be self-sustaining. For the year stocks were up across the board. The S&P 500 finished the year up 26% while stocks from developed international markets were up 32%. In the US, Mid  Cap stocks led the way up 40% while emerging markets were the strongest market of all up 79%. Bonds were no slouch themselves with the Barclays US Aggregate up approximately 6%. Spreads declined dramatically from disaster scenario levels and pushed high quality corporate bonds up 13% and high yield up 44%.