Markets Should Rally in 2009

With all major market indexes down about 40% in 2008, the only investors who made a lot of money last year were the ones who stayed short. For those who are long, the good news is that stocks will probably do better in 2009. According to Sam Stovall of Standard & Poor’s, the 500 Index has rallied 46% on average during the first year following a bear market. This index is already up 20% from its November 20 closing low. I think an additional 20% rally for 2009 is a reasonable expectation. That would bring the Dow back to 10,500, yet it would still leave it almost 40% below its all-time high.

Given all the dismal news, it is encouraging that stocks did as well as they did in December. The Nasdaq Composite actually closed higher for the month—the same month investors learned about Bernie Madoff’s almost unbelievable $50 billion Ponzi scheme. It is simply amazing that Madoff got away with this fraud for so long, especially since Harry Markopolos had been complaining about him to the SEC for nine years. Harry is a securities fraud investigator and past president of the Boston Security Analysts Society. He was also one of my graduate students at Boston College in 1996. You can catch him on CBS in an upcoming episode of 60 Minutes.

The Madoff fraud was not the only major financial news last month. The White House decided to try to rescue the troubled automakers after Congressional Republicans voted against a bailout package for the industry. The Republicans opposed the plan because the United Auto Workers refused to make immediate wage concessions—as depicted in the accompanying cartoon.

Unfortunately, the money being thrown at the auto industry is likely to be wasted. Yes, it will buy the carmakers some time, but it will not prevent their eventual demise. Americans used to purchase 16 million vehicles per year, but now we are buying only about 10 million. The bottom line is that the industry has too much capacity. Even the more efficiently managed foreign makers are struggling. With their higher cost structures, it seems extremely unlikely that all three Detroit companies will survive as independent entities.

My final comment is about lottery tickets. State lotteries have long been thought to be recession proof, so you know times are tough when sales are down. The pros and cons of lotteries are well known. On the one hand, lotteries are a voluntary tax. No one pays this tax unless he really wants to. On the other hand, lotteries hit the poor the hardest because they are more likely than the rich to purchase tickets—and to spend a bigger proportion of their income on them. There is no debate, however, that the odds of winning are stacked against you. Buying a lottery ticket is one of the worst “investments” anyone could make. That’s why I laughed when I read this remark in the Wall Street Journal made by a man trying to explain why he, unlike other people, was actually spending more money on lottery tickets now than he did before the recession. He said,“We need the money—we’re broke.”

Comments

[1977°C:]

i don't understand what mr. Steve Stovall have to do in your article, it is same like to quote a parrot that shouts " Dow go up,Dow go up" and why you are optimistic in 2009?
I may allow only one final saying, your article being great, next time you see personally any stock market commentator, top analyst, super banker, hedge fund star etc., ask them from me:
If you guys are so f.....g good, why you work for paycheck and not do it on your own, what sense is to shave every morning and smile non stop or make smart face, if with your guys knowledge of the world you can be lying in your yacht taking a nap and trading in your free time from fishing.
ALL WHO WORK FOR CORPORATIONS AND ARE QUOTED IN MAJOR MEDIA PIPES CAN NOT BE TRUSTED AS THEY ARE A...S.

Jan 06 11:10 AM

[commoinsens...:]

none of these analyst is ever held to account for their predictions. As for the lottery, I think the odds of hitting the lottery and these guys being right are just about the same these days

Jan 06 11:56 AM

[BigJake:]

I don't see much in this article to support why the market will go up 20%. Will it go up 20% just because it went down 50%? I see nothing in this analysis other than wishful thinking. Give me something to chew on

Jan 06 01:45 PM

[PROXIMO:]

You will learn more about nuclear physics from Forrest Gump than you will learn from this article about why markets should rally in 2009 (Sam Stovall notwithstanding).

Jan 06 02:41 PM

[Schweizer:]

Huh?

With forecast S&P500 earnings, as published recently by the S&P of $42 for 2009, and an average Bear market PE of 8, we will trade at $332 in 2009. How in hell can anyone say we will be up???

Who pays these clowns? Who pays you?

Jan 06 05:11 PM