2009 Outlook for the Economy and Markets- Part I

The year 2008 was the worst year for the stock market since the Great Depression. In the United States, the stock market plunged nearly 40% while international stocks suffered an even worse fate. The primary catalyst was the subprime debacle which began to show itself in mid-2007, compounded by mismanagement of some of America’s once most revered corporations. With this as the backdrop, what’s likely to be our fate for 2009? While precise timing is impossible, there are a number of scenarios that offer hope for a strong stock market comeback before we ring in the next New Year.

Favorable scenarios
  • The stock market reached a bottom on November 20, 2008 and since then has advanced more than 20%. Add that to a possible January rally and we could very well start this year on a positive note. 
  • President-elect Obama has promised an $800 billion economic stimulus package aimed at getting 3 millions Americans back to work through massive spending on infrastructure. Infrastructure spending is a multi-year project so the economic impact will be delivered over time rather than immediately.
  • Federal aid for homeowners facing foreclosure along with federal orchestrated lower home mortgage rates should turn around the housing market. The feds target for fixed rate mortgages is 4.5%. Housing is an integral part of the U.S. economy so reversing the current home price downtrend is vital to restoring economic growth.
  • Massive federal aid for American auto makers along with federal-sponsored easier credit should increase auto sales and resuscitate this industry that was on life support, providing a much-needed boost for our economy. 
  • Lower fuel prices and promised income tax cuts will put more money in consumer’s pockets who, in turn, will head to the malls and boost consumer spending. Remember, consumer spending counts for two-thirds of our total economy so making them happy is crucial to our recovery.
  • There is $8.9 trillion currently held in cash as a result of investors fleeing the imploding stock market. This represents 74% of the market cap of the entire stock market. The last eight times cash on the sidelines was this high, the stock market advanced a minimum of 24% within six months. It won’t be long before investors recognize that earning 1% in a money market account is not a viable solution for their retirement investment plan. Their alternative? The stock market.
  • Inflation and interest rates will remain low during 2009. 
  • Many U.S. industries have reduced production and therefore depleted inventories. As sales increase, so too will industrial production.
  • Implementation of monetary and financial stimulus plans by foreign countries should aid foreign economies and promote U.S. exports.
These are all of the things that could go right and should help us bounce back from one of the worst recessions in recent history. However, there are a number of hurdles that could derail a 2009 recovery. I will discuss these in next week’s column as well as tell you how to best position yourself under any scenario.