2009 Outlook for the Economy and Markets- Part II

In last week’s column, I discussed all the reasons that 2009 should see a significant economic and stock market recovery. I also noted that there were a number of scenarios that could derail a recovery and push us deeper into recession.

Unfavorable scenarios
  • Perhaps the greatest risk is that the credit crunch worsens as banks who have received bailout money continue to use the funds for their own purposes versus lending the funds to consumers and business owners as the government intended.
  • Any economic and stock market rally could be stalled as another wave of bad mortgages known as ‘Alt-A Loans’ come due this year. Alt-A loans are loans whose quality falls between ‘A’ paper and ‘subprime’ paper. 
  • The auto industry rescue plan falls short of what is needed to turn this ailing industry around and another round of bailout money is needed, resulting in eroding investor confidence in the Obama Administration’s ability to solve the financial crisis.  
  • The U.S. economy rolls into a deflationary environment where prices (and profits) are falling based on declining demand for goods and services caused, in part, by rising unemployment. 
  • The Obama Administration and Congress pass the Card Check Bill or some other major anti-business legislation. The Card Check Bill would allow workers to easily unionize a business. 
  • Americans begin to save and pay down debt versus spend and continue to accumulate debt. While this is exactly what I would recommend my clients do, if it became a universal trend, the economy would suffer. Remember, a healthy economy depends on consumer spending.
When you weigh the positives and the negatives, I believe the positives will win and expect the stock market to end the year with gains of 15% to 30%. However, the markets will achieve these results with significant volatility…meaning you will not be able to ‘time’ the market. If your money is on the sidelines waiting for the bottom-of-the-market bell to ring, you’re going to miss out on the opportunity. Your best strategy is to systematically begin moving money back into the market over the next several months. 
One strategy that allows you to win even if your timing is imperfect is to buy blue chip dividend-paying stocks. This take-no-prisoners bear market has left few companies unscathed and that creates an opportunity for you. There are many blue chip companies whose dividends now yield 4% to 6% or more. In other words, you are being well paid while you wait for your stocks to recover. Look for companies who have maintained or increased their dividends for a minimum of 10 years versus companies whose board of directors and executives have shown a willingness to cut dividends. You’ll need at least 20 companies across no less than 5 industries in order to be properly diversified. Note that blue chip stocks tend to be the ‘gateway’ for investors reentering the market after having been ‘burned’ by a bear market. Once a bull market is well underway, investors then tend to fan out into more aggressive areas such as small cap stocks and international stocks.