After watching stocks plunge in 2008 and bounce back in a big way during 2009, you might have expected -- and hoped -- that 2010 would bring a quieter ride.
So much for wishful thinking. After the stock market closed yesterday at its lowest levels of the year, off more than 15% from its highs just two months ago, it seems tranquility isn't in the cards for investors anytime soon.
What happened to bring us to this uncertain pass? Let's take a look back at the first six months of the year, and pick out some of the most surprising things the financial markets have faced.
1. Interest rates somehow got lower
During 2009, investors got used to a stable-to-rising rate environment for bonds. Having come off a near-meltdown in the credit markets, which brought about safe-haven buying of Treasuries the likes of which no one had seen before, it seemed inevitable that rates would jump. Once the panic passed, bonds settled down, with rates on 10-year Treasuries rising from their late 2008 lows to a comfortable 3% to 4% range. Early this year, they challenged that 4% mark and looked poised to break out of that range. Bond bears who'd pronounced the coming bubble in Treasuries saw the script playing out exactly as expected.
Until April, that is. In the past two months, that same 10-year Treasury has seen its yield drop a full percentage point. Utilities Southern Company (NYSE: SO ) and Dominion Resources (NYSE: D ) have reaped benefits from the move, since they're particularly sensitive to interest rate movements and track the overall stock market less closely than more aggressive sectors. Meanwhile, ETF investors using ProShares UltraShort 20+ Year Treasury ETF (NYSE: TBT ) to bet on rates rising have been taken to the cleaners.
Proponents of rising rates have had the same arguments on their side for years. But with the economic recovery anything but robust, many believe it won't sustain growth. In such an environment, even low bond yields can go lower.
2. Tech stocks had further to run
With huge advances in 2009, it was reasonable to expect hot tech stocks to take a breather. But they've done anything but, despite the recent choppiness in the market.
Apple (Nasdaq: AAPL ) is perhaps the best example. Having more than doubled in 2009, Apple shares seemed like they were priced for perfection. But that's exactly what the company has kept delivering, selling millions of iPads and iPhone 4s in well-hyped releases. With such stellar results, adding almost 20% to its shares in the first half of the year seems almost like a letdown.
Similarly, Baidu (Nasdaq: BIDU ) has proven that the Chinese story didn't end with the New Year. Last year's triple still left the stock room to rise a whopping 65% during the first half, and that's even after shares have fallen 10% in recent weeks. Google's perhaps-temporary exit from China prompted investors to declare a victory for Baidu, and even with Google's potential reentry to the emerging-market country, Baidu still commands the lion's share of China's search traffic.
It just goes to show that rising stocks can keep rising higher, especially when their performance justifies the gains.
3. The dollar is back
One of the biggest casualties of the rebound last year was the U.S. dollar. Topping in December 2008, it steadily fell throughout 2009 as stocks came back.
Since January, though, the dollar has bounced in a major way. Realizing that the euro has as many if not more troubles than the U.S. currency led investors to renew their confidence in the dollar. Britain has similar debt-related woes, and fears of a large tax on mining profits have hurt Australia's currency.
The stronger dollar may sound great, but it's bad news for companies that do a lot of business abroad. Nike (NYSE: NKE ) recently projected weaker future earnings due to the stronger dollar, while Coca-Cola (NYSE: KO ) and McDonald's could see similar problems.
How long the rebound will last is anyone's guess. China's depegging of the yuan should cause the dollar to lose ground against the Chinese currency, although it's too early to tell just how freely China's government will let the yuan rise.
Stay on guard
No matter how good you are at predictions, you'll always find some surprises along the way. Being able to switch gears when the unexpected happens is what separates the best investors from the rest.
What do you think will be the biggest surprises in the second half of the year? Get out your crystal ball and share your thoughts in the comment section below.