Wall Street investors on the whole are optimistic. Listed below are two scenarios that may occur in 2009 and the factors that contribute to them.
If you are a pessimist, you believe that the financial crisis will stay with us for the next twelve months. If this is the case, then stocks will decline further from the lows that were hit in November. Growth would have to be significantly weaker than a majority of forecasters currently feel. Deflation will take hold and prices will actually continue to go down. Increased savings will replace an economy where consumers normally spend. As demand remains weak, prices will continue to go down leading to lower demand. In this scenario, buyers are always waiting for the next "lower" price which results in a self-fulfilling downward spiral as consumers are afraid to buy.
We are currently in a recession, one that has lasted about 13 months. The average recession lasts about this length of time. The pessimist, however, expects it to continue which would make this recession the worst since the depression era. If we have a prolong recession, there is a fear that corporate profits will not recover, and all financial assets will decline further, housing included. Such a scenario might ignite further forced selling in mutual funds and in other financial institutions such as we saw in the 3rd and 4th quarters of 2008.
The pessimist sees the market falling another 20% before the recovery takes hold.
Bullish investors think we are through with the worst in the current economic cycle.
Some bulls point to the return of some stability in December as a sign that the fear that gripped the market in the fourth quarter has subsided. The efforts to fix the economy via lower interest rates, government bailouts, infrastructure spending, and possible tax reductions will work. These stimulative actions will lift the market sooner, rather than later as the pessimists forecast. This includes further thawing of the credit markets which have impeded lending and economic expansion. As corporate profitability returns, investors will look for the positives in the economy not all the negatives that were justifiably present in 2008. Even with the dire expectations for earnings in 2009, the P/E for stocks is not expensive by historical standards. The optimist sees a market rising 25 - 35% in 2009.
Given the terrible market we have had over the last fifteen months, it is hard at times to envision a different situation than the one we are currently in. As we have said before, investors tend to think what is happening right now will continue to happen for a sustained period of time. After all, this is how both bubbles are made and then eventually popped. People assume housing or commodities will keep going up almost forever. Exorbitant prices are paid until a slowdown finally returns investors back to reality. Then there is a crash. Once in a crash environment, it is difficult to imagine starting the cycle back up again.
Having said that, the country is not going out of business. The economy is comprised of mostly good companies that are going concerns. However, investors are risk averse, and rightly so, at the present time. As we move into 2009, pessimism will diminish and the huge amount of crash on the sidelines will move back into the market. This will move the market higher. These good companies will be selling at discounts to historical standards and will move higher with the market.
Bruce A. Kraig, January 6, 2009
Kraig Investment Management An unbiased, independent RIA serving our clients' best interests since 1991 Wealth Management...Retirement Planning...Financial Planning 1650 Fox Crossing . West Chester . Pennsylvania . 19380 610 . 644 . 3468 Info@KraigInvestmentManagement.com