Market Analysis: The Year Ahead

After saying farewell to 2009, which included one of the most powerful comebacks in stock market history, Fidelity Investor’s Monthly: Active Trader asked a handful of well-regarded experts for their insights into the trends that may impact traders and investors for 2010. Please note: These opinions reflect the speakers only and do not represent Fidelity Investments.

2010 forecasts
Bernard Baumohl, chief global economist at the Economic Outlook Group and author of The Secrets of Economic Indicators (Wharton School Publishing, 2007), believes that the stock market will continue to go up in 2010 as the U.S. and international economy recovers.

"Profit margins will improve and companies will see increased earnings compared to a year ago. There is also a growing confidence among consumers that this recession is over and that the job market will improve," says Baumohl. "Payroll numbers should turn positive the first quarter of 2010."

Because of these factors, Baumohl says, "We’re looking at roughly 3% growth on average this year and a lower probability of a double-dip recession." Nevertheless, Baumohl doesn’t think the U.S. economy can operate on its own without relying on government stimulus until at least 2011.

William O’Neil, chairman and founder of Investor’s Business Daily and Investors.com, says that normal bull markets last three to four years. "However," he says," historically in periods where there were a number of major problems in both the international and domestic scene, recovery was limited to 1½ to 2 years, so barring any catastrophe, this recovery hopefully should last at least until the late summer of 2010, with perhaps one intermediate-term correction somewhere along the way."*

Of course it won’t all be smooth sailing. The financial meltdown will continue to impact markets in the coming year in surprising ways. It is these unexpected financial events that can unnerve investors. Baumohl says that "You should be aware there will be some aftershocks from the financial crisis, such as what happened in Dubai. But investors must not panic. While there will certainly be a few unpleasant surprises this year, they will not derail the U.S. economic recovery."

Concerns to keep in mind
While the general outlook may be upbeat, the analysts warn of issues to keep in mind as the year unfolds. The willingness of the Federal Reserve Bank to stimulate the economy concerns Fred Hickey, editor of The High-Tech Strategist, which is noted for sending out a crash alert three months before the October 2008 collapse. “If the Fed keeps printing money, there’s a chance stock prices will continue to go higher, even though they are overpriced,” Hickey says. “An irresponsible Fed could lead to the continuation of the world’s economic imbalances and may mean inflated assets.”

If the market became overly exuberant, there would be clues. "You’d see the sentiment numbers get wildly bullish and money pouring into the stock market," Hickey says. "But that’s not happening right now." And if the market rises too fast, he doesn’t think it would be sustainable.

Baumohl would be concerned if the economy were to bounce back too quickly. A sharp V-shaped rebound would heighten fears of inflation, drive interest rates sharply higher, and perhaps lead to a premature cutback in government stimulus. "The best possible world for investors in the stock market would be if the U.S. economy grew at a moderate pace of 3% to 4%," he says.

Jim Rogers, bestselling author of Investment Biker (Random House, 2003) who was profiled in the book Market Wizards, also believes the world economy will continue to get better — at least for a while. But Rogers expects problems ahead, especially with currencies.

"I think you will start to see more and more turmoil in the currency markets, probably even a currency crisis sometime in the next year or two," Rogers says. "Inflation will continue to get worse, which will have an effect on interest rates. The government can only do so much, a trend which will be evident as time goes on."

Hickey says he expects two possible scenarios in 2010, although he can’t predict the timing. "If foreigners decide we’re no longer a good credit risk and they pull out of our currency, we could have a deflationary environment. On the other hand, the wildly inflationary money-printing quantitative-easing Fed might continue all year." Either scenario, he says, is unhealthy. "This wild experiment of money printing to save us from downturns will ultimately lead to disaster."

Baumohl says another obstacle is commercial real estate, which he claims is a "huge cloud hanging over the economy. That is why the banking sector is still unwilling to lend much to consumers and businesses. Until we get past that hurdle, the economy will remain under some constraint."

As the economy picks up, Baumohl says there will be an increase in demand for financing by households and businesses. However, that could collide with the government’s own massive borrowing needs. The result? "With all these sectors competing for funds, it could kick interest rates higher this year. That will hurt the U.S. economy and specifically housing."

Watching bonds
Currently, Baumohl says the bond and stock market do not agree on the future of the U.S. economy. “One has to be wrong. Anyone with extensive bond holdings could suffer serious losses.” He predicts the 10-year Treasury yield will climb this year and that will hurt some bond investors.

Hickey is also concerned about the bond market. "I think bonds are the current bubble. I don’t know the timing of when they’ll blow, but I want to be really careful around bonds."

Hickey believes the government should let the market forces correct things naturally and take the pain. "I would not be printing money and debasing the currency."

Commodities
Even with the most optimistic scenario, investors and traders cannot let down their guard. For Baumohl, this could mean increased tension between the U.S. and Iran. “The optimistic forecast I laid out earlier would be in jeopardy if a military conflict took place in the Persian Gulf.” Baumohl believes that type of political event could cause stocks to probably plummet and oil prices to skyrocket.

Because of the potential obstacles, the key is to have a plan. "Nothing scares me as long as I’m prepared for it and invested," says Rogers. He particularly likes out-of-favor commodities and gold, which is at an all-time high.

If the world economy does get better, Rogers notes, commodities may be a good place to be. "Never before in recorded history has nearly every government printed money at the same time. I urge you to consider real assets in periods of money printing and nasty government spending," he says.

Baumohl is also recommending a portfolio with an allocation to gold because of the uncertainty over the next 12 to 14 months. In fact, he has raised the probability of a geo-political shock to 40%. "The eruption of any major shock could scare people away from shopping, postpone business investment spending, and introduce a lot of uncertainty. In a worst-case scenario, both the dollar and gold will do well." During these times, he’d consider shifting assets into oil, gas, and gold.

Stick with what you know
The consensus is that 2010 will be a positive year for the economy and stock market, with several caveats. Most dangerous to investors and traders are potential geopolitical risks that could derail the expected recovery. Also, look for evidence of massive inflation or deflation. No matter what happens, be prepared and plan for unexpected financial events.

O’Neil says that you should "be realistic. For every one thing you know, there are probably 100 things you don’t know, and all stocks are speculative and involve risk. Therefore, humility and your determination become important. You need to realize you’ve got to study and educate yourself about market realities, methods, and systems that work better."

No matter what happens in 2010, Rogers advises that you stick with what you know. "Find financially sound companies, do the research, and look at places where dramatic changes are taking place."

(Tell us what you think about this article. E-mail comments to Fidelity.Investments@fidelity.com.)

Michael Sincere is a freelance writer and the author of five books on investing and trading, including Understanding Stocks (McGraw-Hill, 2003) and Understanding Options (McGraw-Hill, 2006).

 

The opinions of the experts presented herein are their own and are not the opinions or recommendations of Fidelity Investments. These materials are provided for informational purposes only and should not be used or construed as a recommendation of any security. Fidelity Investments does not guarantee that the information supplied is accurate, complete, or timely, and does not make any warranties with regard to the results obtained from its use.

*According to IBD research, based on market performance from November 18, 1921 – December 31, 2009. Market indexes used include: Dow Jones Industrials, S&P 500 Index, Nasdaq Composite, and NYSE Composite.

Investing involves risk, including the risk of loss.

Generally, among asset classes stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.

The commodities industry can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.

The NASDAQ-100 Index (ex-dividends) includes 100 of the largest non-financial companies listed on The NASDAQ Stock Market based on market capitalization. The Index is a market capitalization weighted index that is designed to represent the performance of the National Market System, which includes stocks traded only over the counter and not on an exchange. This index does not account for reinvestment of dividends.

The S&P 500^® Index is a registered service mark of The McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks that includes the reinvestment of dividends.

The Dow Jones Industrial Average (DJIA) is an unmanaged price-weighted index and is the most widely used indicator of how the country’s industrial leaders are performing. Also known as "the Dow," this is a formula based on the stock prices of 30 major companies chosen from sectors of the economy most representative of our country’s economic condition.

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