Nine Market Predictions for 2009

VIX crossed 80 for the first time in its history, the price of crude soared to $147 per barrel and then collapsed to $30 only to regain a small amount of ground in the last few trading sessions, several mutual funds and hedge funds closed shop, the largest Ponzi scheme was uncovered, credit markets froze and equity markets had one of their largest declines in history while 90 day T-bills briefly had a negative yield. So with all of this unprecedented activity in 2008, what is potentially in store for 2009? Below are my nine predictions for 2009.

1) Equity markets will have high volatility as compared to history, however, they will be at diminished levels as compared to 2008. My expectation is for a relatively strong beginning and end of the year with a difficult middle of the year where markets will break through the prior lows of 2008. The beginning of the year's market will be fueled by increased optimism over a change in administration, a large $750B-$1T stimulus package and a belief by investors that things can not get any worse. In the middle of the year, a realization will occur that things are not improving as quickly as expected and that although the stimulus package will improve growth over extremely low levels in the first quarter it will likely not be as high or as quick as many had hoped. Finally, towards the end of the year, equity prices will once again move higher as consumer confidence finally begins to return very late in the year.

Overall, I am expecting a small to moderate decline (0 to -15%) in equity markets in 2009 with a very strong market (20%+) in 2010. That being said, 2009 will be a year that strong stock pickers can significantly outperform the overall market as pockets of stocks record strong gains (I'll post some of these ideas in future posts).

2) The 10-year Treasury bond, now at 2.5%, will have a very large yield range during the year between 1.5%-3.75%. High-yield corporate bonds, which just a month ago traded at record high spreads of 2200 over Treasuries, will come in and trade closer to 800-1000 basis points over Treasuries providing significant opportunities in the high yield bond market. In addition, investment grade corporates will provide large opportunities for investors, especially, in the AA and below markets. Some speculative bonds such as GM bonds will have 100-200% returns as creditors and the company settle on a reduced payout which is significantly above currently distressed levels.

3) Commodity prices will remain highly volatile. Some areas such as silver will likely register positive results as growth in certain emerging markets improves very late in the year while the spread between the price of gold and silver significantly narrows. Crude oil prices are volatile and will trade in a range of $25-$75 per barrel for much of the year, with lows reached during the second quarter as investors become concerned that China will record near-zero growth (at least unofficially) while prices move higher late in the year as investors become much less risk-averse.

4) Unemployment will reach 9-10% during the third quarter and then stabilize late in the year. The large increase in unemployment will continue to hurt retailing, financials and homebuilders.

5) Default rates on credit cards and mortgages will significantly increase as banks continue to have limited lending. Banks will continue to tighten credit, lowering nearly everyone's ability to freely purchase items. This is a necessary part of the current crisis and the quicker it is done, the quicker that growth will likely return to the economy.

6) The Government will pass a major $750B-$1T stimulus package in February focused on business tax incentives and infrastructure projects, with a second smaller stimulus package passed in the summer which will be more focused on incentives for employers to hire workers and relief for borrowers. The Bush tax cuts will not be repealed this year and will instead expire in 2010.

7) The dollar will be mixed against most currencies during 2009. The dollar will strengthen against the Euro as the Europeans finally realize during the second quarter that they must do more to stop the economic slide. The dollar will end nearly flat against both the Pound and Yen although the value will have large fluctuations during the year. The commodity currencies (Canadian Dollar, S. Africa Rand, and Aussie Dollar) will trade in lock-step with commodity prices and end the year up slightly against the dollar.

8) International equities will slightly underperform U.S. equities as measured by the EAFE but equity markets in Asia and Canada will outperform as the economies in those areas grow faster than domestically.

9) Neither deflation or inflation will be an issue in 2009 as consumer prices will increase a rather tepid 1-1.5%. At various times during the year, investors will be afraid of deflation but massive efforts by the Treasury and Fed to avoid it will help to increase prices slightly. I would note that in 2010 it is very possible that significant inflation issues develop.

Over the next couple of weeks, I will be presenting ideas of how investors can take advantage of these predictions along with highlighting some exciting opportunities in the small and mid cap equity markets.

Comments

[Roger Knights:]

I disagree with this, from #3: "the spread between the price of gold and silver significantly narrows"

Silver is strongly correlated with its industrial use, which should suffer along with other commodities if the economy is bad. At the same time, I think it's likely that gold will de-couple from other commodities, including silver, as large investors worry more about a Depression, inflation, and systemic risk to the financial system.

Jan 07 05:57 PM

[prudentinve...:]

I tend to agree with most of your points, except your statement "Overall, I am expecting a small to moderate decline (0 to -15%) in equity markets in 2009 with a very strong market (20%+) in 2010"

While no one can predict markets, I doubt the very strong 2010. Even though I am not in the doom & gloom camp, I still suspect we are in a multi-year secular bear market which will end with stocks back at their long term trendline, and we are too far above it at present.

Jan 07 09:25 PM

[Carl Spackler:]

A lot of your predictions seem probable. Its good to see someone who is neither another perma bull (stocks going to 1200 S&P) or perma bear (S&P will go to 400). I think your spot on for the unemployment numbers. It would be ironic if we saw neither inflation or deflation-but instead just saw 1% - 0% inflation.. Right now investors are either awaiting the greatest inflationary spike in history or they are expecting depression strength deflation. Not a lot of people playing the middle.

Jan 08 12:19 AM

[Steven Hansen:]

dan,

your predictions are better than most.

Jan 08 02:10 AM

[notsosmart:]

nobody knows anything & until you can get a real truthful unemployment figure its all guess.the dow should never have been @ 14,000 & phony AAA paper should have been outlawed.who trusts what?that is the question.

Jan 08 03:47 PM