CautiousInvestor

12 Reasons Stocks Will Decline in 2009

I take neither delight or relish in agreeing with your sobering assessment of likely developments for the current year. To varying degrees, this is the environment Nouriel Roubini anticipates and pasted below is how these developments translate into economic activity.

One last look at 2008 will reveal a very weak fourth quarter with GDP growth contracting -6%, in the wake of a sharp fall in personal consumption and private domestic investments. We see the real GDP growth contraction playing out through the year as follows: Q1 2009 -5%; Q2 2009 -4%; Q3 2009. -2.5%; Q4 2009 -1%, adding up to a yearly real GDP growth of -3.4% for the U.S. in 2009.

All of this has profound implications for the broader market and it is hard to make a case for a second half recovery when the economy is still tanking. Toward the end of this year trailing twelve month earnings for the SP500 could be in the $ 40 range. A mutiple of 15 would yield an SP500 of 600 while a multiple of 20 offer 800.

The November low at closing was 752 and we closed yesterday at 906. Given the likely economic climate and the nature of the bottoming process, I think 740 will be tested and breached in the first half.