5 Big Market Predictions For 2009
Despite the uncertainty heading into 2009, I find myself compelled to prepare a full outlook for the year. I will identify five key trends to watch for and five events that could prove my predictions incorrect.
Each week through my newsletter, EPIC Insights Weekly (subscribe), I will continue to share my investment insights and offer timely comments on the markets’ direction. I hope you will find value in the information I share and will use it to produce significant returns.
The five key developments for financial markets in 2009 are as follows:
1. Stock markets will plunge to new lows – I develop forecasts to predict fair value of the S&P 500. The fair value estimate serves as a price point at which I am being fairly compensated for assuming market risk. I start 2009 with a fair value target on the S&P 500 of 625. This equates to approximately 6,000 for the Dow and 1,050 for the NASDAQ.
2. Unemployment exceeds 10% – We are living through a powerful transition in our economy as consumers and business de-leverage and begin living within their means. This painful period will result in over 4 million people losing their jobs and unemployment reaching levels last seen in the early 1980s.
3. The mass retail culture dies – Within five miles of my house, I can buy a television at nearly fifteen different stores. By the end of 2009, I will buy that television at less than five stores. As unemployment rises, consumer spending will drop and mass retail outlets will diminish.
4. Treasuries are the next bubble to burst – The Fed has indicated they will do whatever is needed to reflate the economy. Eventually the printing presses will run so hard that investors shun the low yields of Treasuries and inflation returns.
5. Trending markets allow active traders to outperform – As markets skid to new lows, trading opportunities exist. A second half rebound based on positive growth in 2010 offers potential for gains. Those who position within these trends will do well. Those who buy and hold will not.
To summarize, a poor first half driven by a crumbling economy will finally create a permanent bottom that allows for strong gains in the second half of the year. Opportunistic traders will do well as they position for strong market trends.
And while I am confident these predictions will prove accurate, the following events could derail my forecast and point to positive market returns:
1. Biggest January Effect ever - Going into year end, investors have massive amounts of idle cash and no incentive to buy. Why show your investors that you own stocks that are down 60-80% this year? Instead wait until January and then buy the stocks you find cheap. If this were to occur, we will see a massive rally in the first 3 weeks of the year that could easily drive the market 10-20% higher.
2. Obama outperforms – Most Americans have hope that a new administration will cure our economic ills. Obama will be given leeway to implement his ideas. If he executes well, the economy will rebound.
3. Fed removes the punchbowl – After successfully reflating the economy and recapitalizing the banks, the Fed efficiently removes excess cash from the financial system. Doing so allows inflation to remain low, bonds prices to remain stable and equities to outperform.
4. Mean reversion – Historic data shows stocks outperform other asset classes over long periods. With the S&P 500 trading at 1997 levels, we are looking at 12 years of stock under performance. If the historic relationship holds we should see stocks rally over the coming years.
5. World economy heals – If the stars align, policymakers will avert disaster, unclog credit markets and growth resumes. In this scenario, all asset classes except US Treasuries would perform very well.
Looking at these lists, we have expected actions and events that could disprove my thesis. Fortunately, many of my positive surprises, if they were to occur, would happen early in the year. This will allow us to quickly decide if my bearish view shall hold or if 2009 will be pleasant.
As always, I will be watching the markets and provide weekly updates as facts change. Happy New Year!
Sean Hannon, CFA, CFP is a professional fund manager and weekly contributor for StockTradingToGo.com. He runs EPIC Insights Weekly (subscribe) the free Sunday market newsletter, and is the founder of EPIC Advisors, LLC.
