Future Finances Market Update
A Weekly Commentary by Max Larsen

Monday, January 5, 2009

 2009 Predictions – Good News:  The End of the World Has Been Postponed!

 

Most investors said good riddance to 2008 last week and didn’t shed any tears doing so.  As we usher in the New Year – still hung over from last year’s financial rout, there’s still that nagging question:  What is the most likely direction of the stock market in 2009?

 For what it’s worth the market went out of 2008 like a lion as it roared to big gains last week, including Friday’s rally, which got 2009 off to a banner start.  The market surged 6.8% last week and has now gained 8% since the close of trading on Dec. 23^rd (per chart).  Note:  Please remember that Christmas Eve marked the beginning of the Santa Claus rally period, which spans the last five days of the year and the first two trading days of the New Year.  We still have today’s (Monday) session to go, but unless the bottom falls out, it will be said that Santa Claus was nice to Wall Street.  From Briefing.com:

 

Before hitting my predictions for 2009 let’s take a look at how we finally ended up for 2008 – and yes, we made the record books.  As Investor’s Business Daily pointed out:

The Dow industrials plummeted 33.8% - the biggest annual fall in 77 years.  Only 1931 (-52.7%) and 1907 (-37.7%) were worse.  The S&P 500 dived 38.5%, the worst since 1937.

Looking at the results in graphic form doesn’t make the numbers look any better.  Yes, you can put “lip stick on a pig” but it’s still a pig:

 

Predictions are a fool’s errand, an old saying goes.  Still, here are mine for the economy and markets for 2009.

Economy

• Economic news will continue to worsen for another 5 to 6 months. 
• The recession which officially started in December of 2007 will end in July or August of 2009.  Note:  The longest recession we have had since WW II has been 16 months – this one will be longer – up to 20 months.
• Unemployment rate will peak at 8.5% - 9.0%.
• GDP will drop 1% in the first-half of 2009 but may rebound in the second-half so the whole year will be positive – and again pull the rest of the world out of recession.
• By the end of 2009 - inflation will start becoming a problem again.

Markets

• The stock market (Dow and S&P 500) will grow 20%+ for the year.  But,
• The 1^st and 4^th quarters will be good for stocks.
• The summer months and early fall will be challenging for stocks.
• Bonds (corporate – investment quality, junk and municipals) will show double digit returns thanks to the still too large credit spread (between Treasury yields). 
• Bonds may start declining at the end of 2009 due to inflationary pressure rearing up.

Yes, these are pretty optimistic predictions.   Stocks do rebound after a bad fall, but the trick is figuring out when they are done falling.  We have said we believe the stock markets saw their lows in Oct/Nov 2008.

Why the rose colored glasses?  I realize there is a TON of negative news still to come.  Still, I think there are other factors which will overcome the negative aspects.  Here is my list:

• The sheer amount of cash on the sideline is astonishing.  As Bloomberg reported Dec. 29:

      There’s more cash available to buy shares than at any time in almost two decades…The $8.85 trillion held in cash, bank deposits, and money market funds is equal to 74% of the market value of U.S. companies.

• The government in the form of fiscal stimulus and monetary policy is doing everything in their power to turn this recession around. 
• With short-term interest rates for Treasuries and money market accounts down to near zero and 10-year Treasuries returning slightly over 2.15%  - investors will start looking for more return.  This bodes well for bonds and stocks. 
• Valuations for stocks are at reasonable levels.
• Tax loss harvesting is over and most hedge funds are no longer trying to raise cash.
• Gas prices are down.  This is actually a big deal and one which is overlooked.  The financial impact is HUGE!  Note: Moody’s Economy.com estimates that each penny decline in the cost of gasoline saves consumers $1 billion over the following year.  Assuming gas prices now at $1.50 from a high of $4.00 that’s a $250 BILLION stocking stuffer!
• Finally, mortgage rates are dropping like stones and may be the lowest in 50 years!  I’m seeing 30-year rates at 4.75% (Business First) and expect them to drop even further.  This will raise cash via refinancing and generate more interest in buying some of the excess inventory in the market.

January brings a lot of hope.  The saying “as January goes, the year goes” has been historically very true.  Let’s hope for a strong month as consumer confidence should improve with low gasoline prices and mortgage rates.  We are also looking at a massive stimulus package that may help the economy in the short-term – although I’m dreading the waste and pork and the long-term ramification.

Have a wonder week my friends.  I hope everyone has a HEALTHY, HAPPY AND PROSPEROUS NEW YEAR!

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