"Hello 2009" by WCM 01/01/09 Part 2 |
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We are already hearing all the predictions for 2009. They range from a Dow 5000 to a market recovery of twenty-five plus percent. Both sides have good arguments.
For those that are predicting a continued market decline, the number one reason they give is JOBS. There is no doubt that we will continue to see the unemployment rate increase, but just how bad will it get? Will it hit the dreaded ten-percent mark? We’re not sure, but it could get close. Consumer spending makes up seventy percent of our GDP, so if people aren’t working or are afraid they will lose their job, they won’t spend.
Another reality is the decline of corporate earnings. Lower consumer spending will hurt earnings. Also, we need to keep in mind that if the earnings of many companies (mostly financials) were based on extreme leverage (up to 35:1 in some cases), then what will earnings look like when all this deleveraging has taken place?
Many predict we will see housing decline another fifteen to twenty percent on 2009. A good percentage of consumers spending came from home equity. This decline in home values affects consumers as they see their net worth decline, thus leading to some of the lowest consumer confidence numbers we have seen in decades.
There are many more pessimistic observations the bears provide to back up their predictions. However, there is a case to be made that we are at the end of the tunnel, and the light is bright coming out of it.
We are twelve months into the recession, just four months shy of the longest recession in the postwar era. The market has already priced in a horrible 4th quarter GDP, earnings, and jobs outlook. Given that, we know the stock market has a tendency to rebound four to seven months before the economy improves. We’ve seen the market rebound twenty percent since the November 21st market low. Could this be the beginning of the rebound that history dictates?
The upcoming stimulus package will be massive. Some numbers have it topping one trillion dollars. This, along with interest rates at all time lows and the Treasury seeming to back any company or industry that needs help, could provide the foundation the economy needs to regain its footing.
The historic sell-off has left shares trading at low valuations. The S&P 500 is currently trading at twelve times expected earnings going forward, about fourteen percent below levels a year ago. Bargain-basement prices and over a trillion dollars of cash sitting on the sidelines makes the odds for a rally next year much more favorable. Also, don’t forget that consumers are saving a billion dollars a day because of lower gas prices. The savings due to the lower gas prices will allow consumption to shift to other meaningful areas in the economy.
We are not going to be so bold as to try and predict what the market will do next year. One thing that we do know for sure is that we are not seeing any signs of an economic recovery at this point. While unprecedented steps have been taken to try to pull our economy back from the edge, we have yet to see any leading indicators begin to improve. Jobless claims, unemployment, building permits, consumer confidence, orders for consumer and durable goods…none of these are showing signs of recovery at this point. However, when they do finally start to show proof that things are indeed getting better, we would expect the stock market recovery to be well under way. Because of this, we stress the importance of maintaining a proper allocation, as well a proper perspective when monitoring your investment portfolio.
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