Coming into 2009, the major themes we were looking at included a recovery in the U.S. stock market, a low interest rate environment, and an end to the recession. Now that checkmarks have been placed next to each of these prognostications, the question becomes: What will 2010 look like and what are the best investment strategies to employ going into the New Year?
While predicting that both the longest recession since the Great Depression and the worst bear market in a generation would end in 2009 was logical and not terribly far reaching, looking ahead to 2010 is definitely a bit more challenging. But, since having a theme to work from is important in the investing biz, we’ll go ahead and take a stab at it.
It’s the Economy…
Based on what we’re seeing in the data lately, it is safe to say that the outlook for the economy in 2010 is a bit of a question mark. The bulls argue that the rebound is underway and while the recovery will be rocky, we can expect to see growth continue throughout 2010. Our heroes in horns point to a low interest rate environment throughout the year, ongoing benefits from stimulus spending, increasingly better earnings, and a global rebound.
Yet on the other side of the aisle, our furry friends argue the following: (1) the consumer has made a generational shift in their spending patterns and now wants to avoid debt at all costs, (2) small business, which is traditionally the driver of job growth, is in a sorry state due to increasing tightness in lending, (3) the jobs market is unlikely to improve any time soon, (4) the stimulus spending will dry up in 2010, (5) the dollar’s slide is likely to continue, (6) increasing taxes and massive spending in Washington could present headwinds to the economy, and (7) the Fed will be forced to start exiting the party and raising interest rates. To hear the bears tell it; all of the above will lead to a weak economy on a best-case scenario and a double-dip recession if one chooses to look at things from the glass-is-half-empty perspective.
In looking at investment strategies from an economic standpoint, it is important to understand the relationship between the economy and the stock market. The joke is that the stock market has predicted 12 of the last 6 recessions. Thus, the argument economists like to make is that the stock market is a lousy predictor of the economy. And yet, it is interesting to note that the majority of economists have failed to predict any of the last 6 recessions. So, gun to the head, it looks like the stock market is the better predictor of economic cycles.
The next question is: Does the stock market lead the economy or vice versa? While this topic is often hotly debated, we’re of the mind that the stock market leads and then looks for confirmation. The market action in 2009 was a perfect example of this.
Stocks bottomed on March 9th and then began to rebound after Jamie Dimon told us that his bank was making money during the first quarter. With the failure of the banking industry suddenly off the table, the stock market began to remove the Financial Armageddon discount. From there, the market went on to discount the end of the recession and is now working on the issue of the strength of the recovery.
From where we sit, we would expect the market to continue to look for confirmation that its record-breaking rally has “gotten it right” in terms of predicting a rebound in the economy. Therefore, it is safe to say that utilizing a flexible approach in your investment scheme in 2010 makes a lot of sense.
In short, we don’t think this will be a year where you set up a strategy and then buy and hold. No, we feel that there are risks – big risks – out there, and that investors will need to have the ability to “go both ways” if things don’t work out as one’s crystal ball predicted.
Other Themes Worth Recognizing
While we believe that the state of the economy will be a driving force – especially early in the year – there are other themes that we feel are worth paying attention to in 2010.
Secular Bear in the Buck: We believe that the U.S. dollar remains in a secular bear market. This is not to say that the greenback will plunge from here. After all it has lost more than 15% since the stock market
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