Will 2009 Be as Bad as 2008?

It’s not wishful thinking (or the emotional exhaustion talking), but 2009 is apt to be a calmer year that will reward stock-picking.

The notion may seem delusional following a market collapse that spared virtually no asset class (except Treasuries) and that meted out double-digit drubbings to every single stock-market sector. Economists are still bracing for a deeper economic slide and traders are waiting for companies to report very messy fourth-quarter earnings come February.

But peak volatility is rarely sustained over time. In a market where a deep recession has become rooted as consensus, where central banks are flailing very publicly in their fight to fend off disaster, bad news ultimately loses its ability to shock.

- “Coming In 2009: Stockpickers’ Paradise” (subscription required) , Kopin Tan, Barron’s, The Trader, Saturday December 20

As 2008 winds down, most are expecting more of the same in 2009. While I think 2009 will be a dreary and difficult year, I don’t think we’ll see the same level of emotion, volatility or decline. Stocks have dropped by about 40% so far in 2008, and for stocks to drop another 40% in 2009, the S&P would have to trade into the 500s, which is highly implausible to me. Then, the good news is that the worst has passed, and 2009 will be bad, but not nearly as bad, as 2008.

One piece of evidence suggesting the worst has passed is the tremendous falloff in volatility over the last few weeks. After reaching as high as 80 in October and November, the VIX has sold off substantially in the last few weeks, approaching the 40 level of late.

My guess is that 2009 will be more sideways than down. I expect the lows of November (741 on the S&P) to be tested but I don’t expect substantially lower lows. Everybody knows that we’re in a recession, that it’s a very bad one and that corporate earnings will be terrible for the foreseeable future. It’s been front-page news for months. Unless you live in a cave, you know the economy is terrible. That means a lot of this is already in stock prices and, as Kopin Tan wrote, bad news will lose the ability to shock.

When I write this kind of thing, I get a lot of e-mails from people telling me that I just don’t understand, it’s the Great Depression all over again, I’m going to get crushed, etc… It’s tiresome and tedious at this point. When everybody thinks that way, and we’re approaching that point, who is left to sell and push stocks lower? When this is how the crowd thinks, it is mostly priced into stocks already.

A couple of recent Wall Street Journal articles, including one on Monday’s front page, drive home this reality. Monday’s headline read “Stock Investors Lose Faith, Pull Out Record Amounts” (subscription required - The Wall Street Journal, Monday December 22, A1).

“I don’t have any confidence in buying any new stocks,” says David Herrenbruck, a 52-year old New York photographer. “Maybe now would be a good time to buy stock. But I am scared, to tell the truth,” says Peter Lush, a 61-year old Georgia retiree. “You put in all those years, and it is just falling right away from you. I was so fearful that I was going to lose everything,” says Karin Kuder, who had 60% in stocks at the beginning of the year, cut back to 50% in March and bailed out completely in October.

The same kind of sentiment was revealed in a Wall Street Journal article from about a month ago: “Fear And Frustration: Some Calling It Quits” (subscription required - The Wall Street Journal, November 24, C1).

“I just don’t have the stomach for it anymore,” said Eugene Hibbs, a 66-year old semi-retired computer programmer in Santa Barbara, CA. Mr. Hibbs was entirely invested in stocks at the beginning of the year, shifted into commodities mid-year when stocks started selling off and then sold out of those when those started tanking as well. Now, he’s sitting in t-bills. Same story for 41-year old Fairfax, VA-based plastic surgeon Chris Hess, a buy and hold investor who sold all his stocks after seeing his portfolio sink 60%: “I’m never going to get my money back.”

“I saw markets continuing to implode, economists talking about a long, deep and harsh recession, experts bailing out. I added that all up and said, what am I doing there?” said 49-year old Rory Olson, CEO of Stock-Trak Group, a Montreal based company that runs a stock market simulation platform. Up until October, Mr. Olson had 90% of his holdings in stocks but sold them all within a 36-hour period. Long time investor Denise Zoros, a 53-year old mortgage broker, bought stocks in the Crash of 1987 and figured this time would be the same. She bought stocks as markets fell this year and was fully invested at the time of the article. “[Warren Buffett] says get greedy when others are nervous. But I don’t think I can do that anymore. I am getting ready to throw in the towel,” she said.

So, when you send me an e-mail telling me that tons of retailers are going to go under, more banks are going to fail, unemployment is going to skyrocket, it’s all going to hell and it’s going to be Great Depression II, you’re boring me. That doesn’t impress me much. Really? How original! Who else is thinking along those lines? You’re the only one you genius with your incredible economic insight!

What matters is how things will be in 2009 in relation to the expectations that are now priced into stocks. That’s the key. You need a variant perception to make money in stocks, and the great Michael Steinhardt discovered this many years ago. Because a pretty dire outcome is already priced in, in my opinion, we are going to need a catastrophe in order to push stocks substantially lower. While 700 is not “substantially” lower, 500 is.

I’m starting to work on my report for investing in 2009. The tentative title is “Too Late to Sell, Too Early to Buy: How to Invest in 2009.″

Comments

[investor88:]

A logical case for a better 2009 - tis is by no means certain. On the other hand sp500 at 500 to 700 is also quite possible. So we navigate cautiously and review regularly along the way.

2008 Dec 23 08:07 AM

[Roger Knights:]

"My guess is that 2009 will be more sideways than down."

This qualifies you as a "Bunny," my term for one who anticipates a zigzag path (rabbits do this to throw predators off their track). I think what the bears may be missing is that strong inflationary injections will keep stocks at about the same nominal prices, even while they lose value.

It's kind of odd that, although markets move sideways at least 1/3 of the time, stock market soothsayers are focused almost entirely on the question of "Up or Down?"

2008 Dec 23 09:28 AM

[prudentinve...:]

You state that people e-mail you to the effect that "..it’s all going to hell and it’s going to be Great Depression II, you’re boring me..". Perhaps these people are not trying to bore you by repeating the obvious, but implying that the obvious is not yet fully priced in.

2008 Dec 23 10:30 AM

[Asbytec:]

Volatility is down in the last few weeks? Has anyone checked oil prices? (Rhetorical) Currencies? Ok, maybe in the markets. But we're still along way from being back to normal and the markets could be hit.

A bottom by mid 2009 is not out of the question, but I believe it's optimistic. Job losses are still rising at high rates and may not peak for a while. The Big 2 are in restructuring. Obama is going to introduce stimulus. Fed rates are zero and QE is just beginning. Banks are still paying out and trying to remove toxic debt...a lot of toxic debt.

But, if leveling out means volatility, then I'm with you.

2008 Dec 23 10:45 AM

[kurt walter:]

Will the big sale continue in 2009? I hope so. I am trying to buy as much as I can with monthly cash flow. Don't stop the sale, yet.

2008 Dec 23 01:22 PM

[OldLimey:]

"....who is left to sell and push stocks lower?"

Hedge funds. There won't be nearly as many around in 6-9 months as there are today. Deleveraging an ongoing business is one thing, and we've seen a lot of that - with arguably more to come (but who really knows); taking down the shingle is something else altogether, and that may have a lot further to run.

2008 Dec 23 02:04 PM

[jepittman:]

IMO if there is one thing the market probably will NOT do in 2009 is go sideways. The economy will either fail to recover in the forseeable future and the market will discount that or it WILL be seen as recovering in the forseeable future and the record amount of money in the financial bomb shelters will all attempt to get through the door at the same time. Its likely going to be one way or the other. A clue will be how the prices of corporate bonds behave. If there is no recovery soon they will continue to languish and/or fall. If investors sense a recovery prices will rise. If they rise, equities will follow.

2008 Dec 23 11:19 PM

[thatguy57z:]

OK all these new people think they got in down on all there research from the almanac, well act on this I was there in the 70's and the 80's and it is nothing like this at all your going to see the market drop down in the next six working days about 50-200 points. more job's lost, more foreclosure, get your money out of the banks because the first bailout didn't work. all it did was pad there pockets for the money that they the bankers FNMA, and Freddy mac good money after bad. and then the big 3. look at the pattern.Is everyone blind the market is going to fold. its a number game and day traders. good luck and the new thieves are coming 2009

2008 Dec 24 03:04 AM