Double-digit stock returns in 2010? We’re there

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With this week’s hot stock market rally, check your mutual fund returns. If your equity funds aren’t showing double-digit gains for the year to date you’re lagging behind most broad market indexes.

Stocks’ surge this week lifted the Standard & Poor’s 500 index to 1,225.85, a two-year high and up 9.9% since Dec. 31. Including dividends paid, the S&P index’s “total return” now is 11.8% for the year.

Even better, indexes of small- and mid-size stocks have been trouncing the blue-chip S&P 500. Smaller stocks have benefited from some investors’ and traders’ willingness to take greater risk in search of higher returns as optimism about the economy has rebounded.

The Russell 2,000 small-stock index is up 19% year to date with dividends; the S&P 400 index of mid-capitalization stocks is up 19.9%.

If the market felt frothy this week as investors reacted to the Republicans’ big victory in Tuesday’s election and to the Federal Reserve’s promise to pump $600 billion more into the financial system, the performance numbers show that buyers were in fact bidding aggressively for stocks. The Russell 2000 index surged 4.7% just for the week, the S&P mid-cap index jumped 3.8% and the S&P 500 rallied 3.6%.

To put it another way, this week alone accounted for about 25% of the Russell index’s return for the year, 19% of the S&P mid-cap return and nearly 31% of the S&P 500 return.

Among broad stock mutual fund categories, small-cap “value” stock funds are up 18.6% this year, on average, according to Morningstar Inc. Small-cap “growth” funds are up 18.2%.

Large-cap value funds are up 10.1% for the year, on average, while large-cap growth funds have gained 12.1%.

The average foreign-stock fund is up 13.6% this year compared with 12.7% for the average domestic fund, according to Morningstar. Foreign funds have gotten an added boost from the dollar’s slide against many foreign currencies.

One more factoid: If U.S. blue-chip indexes can finish the year with double-digit percentage gains, this will mark the first time since the late-1990s that investors earned back-to-back annual double-digit returns in that market sector.

After plummeting in 2008 with the financial-system meltdown, stocks rebounded sharply in 2009. The S&P 500 lost 37% in 2008, then jumped 26.5% in 2009.

The last time the S&P was up by double digits two years in a row was in the boom years of 1998 (28.6%) and 1999 (21%).

But even with the latest market hot streak, many investors still are a ways from recouping every dime they lost in the crash. The S&P 500 remains nearly 22% below its record high of 1,565.15 set on Oct. 9, 2007. The Russell 2,000 is 14% below its all-time high reached in July 2007.

The S&P mid-cap index is much closer to taking out its old peak: It is 7% below the record set in July 2007.

-- Tom Petruno