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One year later

Mood of investors turning more guarded Add to ...

Abandon hope, all ye who enter here. Or so the ticker seemed to read.

Exactly one year ago Tuesday, the Dow Jones industrials average sank to its lowest point in the financial crisis, a level not seen in more than a decade. Just days earlier, the Standard & Poor's 500 actually read "666," a source of grim humour in a market that felt a touch infernal.

In the 12 months since, investors have travelled the spectrum from despair to elation as a historic rally gripped stocks worldwide.

Both the blue-chip average and the S&P 500 are up more than 60 per cent from a year ago. Canada's benchmark stock index has surged 58 per cent. Financial stocks, demolished in the crisis, have been the best-performing sector in the rebound.

But now the mood is turning more guarded. The Dow and the S&P 500 have struggled to make progress in 2010, up only 1 per cent and 2 per cent, respectively, for the year so far.

Looking ahead, investors face a different calculus than they did a year ago. Last March, the question on most minds was whether the financial system would collapse and trigger a new Great Depression. Those who were willing to wager that the bottom was near reaped huge benefits, scooping up cheap stocks by the barrelful.

Today, the leap of faith required is more subtle: How vigorous is the economic rebound now under way and is it a lasting one? Even investors with an optimistic view of the recovery see reasons to stay on the sidelines, from worries about government debt to the feeling that the best of the rally may be in the rearview mirror.

"Now you're frozen," says Art Hogan, chief market strategist at Jefferies & Co. "That's why we've been stuck in our tracks."

In the United States at least, mom-and-pop investors burned by their experiences in the financial crisis remain highly wary of returning to the stock market.

So far this year, U.S. stock mutual funds have seen overall outflows of $4.6-billion (U.S.), continuing last year's trend, according to the Investment Company Institute. Instead, investors have plowed money into bond funds, which have taken in more than $56-billion.

Not surprisingly, preserving hard-earned savings is the top concern for average investors. The gains in stocks since last March have been astounding - except when you compare them to what people felt they had, if only fleetingly, at the top of the market. A Dow Jones index that tracks nearly all U.S.-based companies shows gains of $5.6-trillion in the stock market in the past year. To regain their peak in October of 2007, stocks would have to add that same amount all over again.

In Canada, investors appear somewhat less gun-shy. The shares of most Canadian banks - the foundation of many stock portfolios - have roughly doubled during the past year. The best performer on the S&P/TSX in the past year was mining firm Teck Resources Ltd. Its stock price multiplied by more than 11 times as commodity prices rebounded and the company reduced its massive debt load.

Even investing pros sound shaken when recalling what it felt like a year ago.

"We were more on the brink than at any time during my career in the markets," says Uri Landesman of ING Investment Management in New York.

Investors were so frightened that they punished nearly every company with borrowing on its balance sheet, and not only in the financial sector. General Electric Co., an industrial bellwether, sank to $6.53 a share.

Mr. Hogan of Jefferies reaches for the physical metaphor. Unlike the market crash of 1987, where the worst was over in a matter of days, during the financial crisis stocks unravelled for months and the tumbles only seemed to get worse. The former was like "ripping off a Band-Aid, you got it over quickly," he says. By last March, however, it was like "someone punching you in the face every day at the office."

In retrospect, those who suggested that stocks were a major bargain can claim vindication. Less than a week after the Dow touched its 12-year low in March, 2009, Larry Summers, President Barack Obama's economic adviser, noted in a speech that stock prices adjusted for inflation "may be regarded by some as the sale of the century."

Fast forward a year. Economic data, while not uniformly good, is far from grim. One example: the U.S. economy shed 36,000 jobs in February, compared with 726,000 in the same month in 2009.

Companies have surprised investors with better-than-expected profits. Central banks are starting to discuss rolling back some of their emergency measures. A number of banks have even repaid much - or all - of the bailout funds they received from the U.S. government.

Market watchers tend to fall in one of two camps. The more pessimistic believes stocks rose too quickly last year and the economy risks sliding back into recession, a so-called "double dip" scenario.

The other camp believes that the recovery is well entrenched, even if it doesn't prove to be a straight line. By that logic, stocks look cheap, according to Mr. Hogan. The stocks that make up the S&P 500 are trading at a discount to their long-term average, measured by their price-to-earnings ratio. What's more, at a time when there is very little inflation and rock-bottom interest rates, stocks should be particularly attractive to investors.

The latest round of earnings releases, which provided a snapshot of performance for the last three months of 2009, provide some support to the rosier view. Sales have now grown for two quarters in a row, while profits have risen for four, according to a recent note from Deutsche Bank. Outside the financial industry, profit margins increased, and companies' own estimates of future sales and earnings climbed.

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