At the beginning of the year I presented my nine market predictions for 2009. For this article, I will give a mid-year report card on these predictions as well as any updated thoughts for the rest of the year. Each of the nine predictions are shown exactly as they appeared earlier in the year followed by a grade and update as to my thoughts:
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.
Grade thus far: TBD. Comments: Timing of predictions were off although ultimate return levels still look to be on target. I am predicting a difficult market environment in the third quarter which will be followed by an end of year rally which will result in similar returns to what was forecasted of 0 to -15%.
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.
Grade thus far: B-. The GM bonds actually did fairly well late in the period as the company and creditors did settle on a reduced payout although the ultimate outcome is still somewhat in doubt. The prediction on high yield corporate bonds along with investment grade corporates has been on target. The 10-year bond briefly made it to 4% but has recently fallen back to 3.5%. I would expect going forward a range in the 10-year Treasury of 2.75-4% for the remainder of the year.
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 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.
Grade: D. Everything was good about this prediction except for China where the stimulus package has resulted in relatively healthy growth at least against the rest of the world. My predictions on the prices of energy remain unchanged as I do not see inflation as being an issue this year and demand/supply levels favor lower rather then higher prices in the short term. That being said, commodities may have a great run in 2010.
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.
Grade: A-. Unemployment was just recorded at 9.5% although whether it will stabilize late in the year is still in question. I would not be surprised to see the official number reach slightly above 10% by the end of the year. The high unemployment rates have continued to hurt retail, financial and homebuilding companies although the stocks have had significant rebounds off their lows of March.
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.
Grade: A-. Default rates have clearly increased significantly and credit terms are becoming more and more strict. The new law on credit cards that is to be enacted in 2010 will likely result in much stricter credit terms and rates going into the last half of 2009.
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.
Grade: TBD. The first stimulus package was passed and had infrastucture built in but had little in the way of business tax incentives. The programs to help borrowers were enacted but in many cases have not been fully implemented such as the Making Home Affordable program where most borrowers are not able to refinance as of yet due to hangups such as mortgage insurance. It is to be determined whether another stimulus bill is to be passed but its possible.
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.
Grade: C. Thus far the dollar has declined year to date especially against some of the commodity currencies. I would not be surprised to see a short term rally in the dollar as nearly everyone is pessimistic (usually a good time to be contrarian) and conditions in Europe and Japan are actually worse then those in the U.S. Long term, its clear the dollar is in trouble as budget deficits which reach 100% of GDP are not positive for your domestic currency.
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.
Grade: TBD. Thus far the predictions on Asia and Canada have been very good as growth in non-developed asia has been relatively healthy and Canada has performed somewhat better then the U.S. Currency effects have helped international equities. I have no changes to this prediction for the rest of the year.
9) Neither deflation or inflation will be an issue in 2009 as consumer prices 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.
Grade: B. This looks to be on target at this point with fears of deflation and inflation alternating over the year thus far. I think that the near-term fears of inflation are overdone while longer term inflation could be a problem depending on how quickly Bernanke takes away the punch bowl.
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