2010 Economic and Market Outlook

2008 and 2009 were tumultuous years to say the least. We experienced an economic and stock market collapse second only to the Great Depression followed by a breath-taking stock market recovery to close out this year. So what should you expect for 2010 and how should you position your investments? 

The Economy. It’s important for you to separate the economy from the stock market. You need look no further than last year to clearly see the two do not move in lock-step. Throughout most of 2009, the economy continued to worsen but at a slower and slower pace while the stock market soared over 60% from the March 9th lows. 
There are many signs that the economy is continuing to improve amid historical low interest rates that have been orchestrated by Federal Reserve Chairman Ben Bernanke. Expect interest rates to remain at current levels at least through the first half of 2010. As inflation becomes more evident next year, the Federal Reserve is likely to reverse its course on interest rates and begin raising rates in the third or fourth quarter. The Obama Administration and Congress finally understand that priority number one is creating jobs so look for unemployment to fall. Unfortunately, unemployment will remain in high single digits suggesting we will see a mostly jobless recovery next year.
The Stock Market. Historically, the stock market leads the economy out of a recession and this recession appears to be no exception. Since the March lows, the stock market has risen over sixty percent and may be due for a breather before building a new base and rising further. On the bright side, corporations have diligently trimmed the fat from their organizations and are poised to be highly profitable as the economy reignites. Further good news is that there is approximately $3.2 trillion sitting in money market accounts. This is ‘scared’ money that is currently earning less than 1% but is anxious to move into the stock market once confidence is regained. In summary, we are likely to see one or more downward spikes before the market rebounds to what could easily be double-digit returns by year end.
What to do now. It’s impossible to know when a market correction will occur. If you have money on the sidelines, consider averaging those funds into the market over the next twelve months. Domestically, I like blue chip dividend-paying stocks. Make sure you own a minimum of twenty companies in at least five different sectors. Companies like AT&T, Southern Company, Kimberly Clark and Consolidated Edison are good prospects and pay dividends yielding three to four times the interest paid on current money market accounts so you’re getting paid handsomely while you wait for stock performance. International stocks should also do well. You’ll want to own a large basket of stocks so a good choice is an Exchange Traded Fund such as EFA. For emerging market stocks one of our favorites is EEM. Ultimately, you’ll want to plan on a holding period of at least three years. As always, seek guidance from a professional advisor.