Then there is the change in behavior among consumers. Remember, the consumer represents two-thirds of the country’s GDP. Therefore, given the wealth destruction that has hit John Q. Public’s 401(k) and his home, as well as the uncertain job market, we expect the consumer to remain in a cautious mode for much of the year – if not for many more years to come.
Don’t Fight the Fed
The old Wall Street saw, “Don’t fight the Fed” is intended to remind investors that stocks don’t perform well in a rising interest rate environment. In the case of 2010, while we don’t think we will see the Fed raising rates, we do feel that investors will have to deal with rising rates.
Although the FOMC may not actually hike rates, this is not to say that the Fed and market interest rates won’t become a stumbling block for our heroes in horns. Over the past two weeks, we have seen two separate announcements out of the Fed introducing programs designed to withdraw liquidity from the banking system. And given the massive amount of monetary assistance the Fed provided during the crisis, Bernanke and Co. doesn’t need to raise rates in order to become antagonistic to the stock market.
Don’t forget that the Fed in general and Bernanke in particular, have taken a lot of heat for allowing the housing bubble to get out of hand. Regardless of the fact that pricking bubbles has never been part of the Fed’s job description, the Fed’s so-called exit strategy is becoming a political and economic hot potato.
Now factor in the fact that the Fed’s “quantitative easing” programs (the direct purchase of securities) are scheduled to end in the first quarter and it isn’t much of a stretch to see that the Fed will be commencing with its exit strategy very shortly.
While we're on the topic of interest rates, the other thing to keep in mind is the Fed only controls the Fed Funds and Discount Rates. The world’s traders actually control the rest. And if you have a moment, take a peek at a chart of the yield of the 10-year T-Note. You will see that while the Fed has pledged to keep rates low for an “extended period,” market rates are already on the rise in response to improving economic data.
While we don’t expect to see rates spike to the upside, we do need to remember that rising rates have a negative impact on stock prices. Then when you mix in the more than $2 Trillion the Treasury needs to raise over the next 12 months, the idea of rising interest rates probably ought to be part of investors’ 2010 plans.
Will Earnings Get Real?
There is little doubt that earnings will continue to “improve” during the first quarter of 2010. The comparisons to the year-ago quarter remain akin to a child leaping over a bar placed directly on the ground. Thus, the expectations-versus-reality game played when comparing earnings to analyst forecasts ought to favor the bull camp for another quarter or so.
However, it has been quite clear that much of the gains seen in earnings lately have been driven by cost cutting. So, when you consider that costs can only be cut so far, at some point, we’ll need to answer the question: “Where’s the beef?
In English, we’re trying to say that investors will need to seen a “real” pickup in earnings at some point in 2010. And we’re not talking about “operating earnings” either. No, we’re saying that traders will want to see things like sales and/or revenues heading north if the bulls’ run for the roses is to be extended to any great degree.
At What Price Value?
As we wrote in our recent article Are Valuations Becoming a Problem? if you’re looking to start an argument about the stock market, bringing up the subject of market valuations will usually do the trick. You see, there are as many ways to look at valuations as there are ways to interpret the indicators.
It is important to understand that stock market valuation is more art than science due to the level of interpretation involved. But, after poring over numbers indicators, we will have to conclude that stock market valuations are becoming
