| | |
the Wealth IQ Report Wealth Management is more than just portfolio management. It encompasses a disciplined professional approach to growing, protecting, preserving, utilizing, and transferring your wealth, using a broad range of services and an experienced team of advisors. |  |
Now that 2008, arguably one of the most volatile years the stock market has ever experienced, is now behind us, it's time to look forward and start preparing for 2009. For this month's Wealth IQ Report, we discuss 2009 market predictions from the three well-respected economists.
Please feel free to contact me at (888) 944-7736 if you have any questions about this article and how it may pertain to your situation.
Sincerely,
Darren Whissen
What's in Store for 2009?
To say that 2008 was challenging is an understatement. First, the housing bubble finally ran out of steam. Shortly thereafter, the credit markets asphyxiated consumers and businesses alike. Unemployment has risen dramatically to 6.7%, or higher, depending on how you interpret the data. Payroll employment has dropped 1.2 million over the past three months, and accelerating layoffs in recent weeks suggests that actual job losses will remain high or escalate into early 2009. As of December 22nd, the S&P has fallen more than 40% since the first of the year. And finally, the U.S automotive industry is on the brink of bankruptcy
So, with so much bad news already on the table, many are asking what's in store for 2009. To answer that question, we turn to three respected economists for a glimpse at what 2009 might hold.
While the situation is certainly serious and risks abound, Milton Ezrati, Senior Economist and Market Strategist for Lord Abbett, states "the probabilities suggest something less alarming and far less dire than these increasingly common forecasts of a ‘financial meltdown' and another ‘great depression', such as in the 1930s." He cites the advent of deposit insurance as well as a better understanding of how monetary policies affect the economy as two major differences between now and then.
Mr. Ezrati believes that "current market signals...have lost touch with reality" and that stocks and bonds are priced well below any fundamental level due to pervasive emotional fears. He estimates that stocks will likely rally by the first half of 2009 even though the underlying economy will still likely lag, primarily due to a lifting of general market fears.
Mr. Ezrati cautions, though, that investors must consider certain risks. In particular, he warns that the current panic can exacerbate market volatility, citing "[markets] have shown themselves capable in the past of moving contrary to fundamentals for extended times."
Click here to read Mr. Ezrati's full analysis
Joseph Carson, U.S. Economist and Director of Global Economic Research for AllianceBernstein, estimates that U.S. GDP will have dropped by at least 4% to 5% in the fourth quarter of 2008, and will continue to drop another 2% to 4% in the first half of 2009.
Mr. Carson believes that U.S. GDP should recover by the second half of 2009. "If aid to the auto industry is settled in a positive way, it could help stabilize the economy in the short run and lay the groundwork for a broader recovery later in 2009."
He acknowledges that the "nature of the current contraction is different from many previous downturns, but even the harsh effects of a credit crunch are not insurmountable." Of course, the downturn will still be painful and could ultimately inflict as much damage as the recessions of the mid-70s and early 1980s, which lasted 16 months and triggered peak-to-trough declines of between 2.5% to 3% in real GDP.
But, Mr. Carson's research suggests that "the velocity of a downturn does not diminish the velocity of a rebound." Thus, he believes that the economy has the potential for a much stronger rebound in the second half than the consensus estimates suggest, as long as policymakers stick to their promises to prevent a collapse of the auto industry and deliver impetus for economic growth.
Click here to read Mr. Carson's full analysis.
Andrew Tilton, Political Analyst for Goldman Sachs, hypothesize that 2009 Fed policy will focus on three areas: (1) easing the impacts from the decline in individual spending, (2) helping banks clear their balance sheets of illiquid or troubled assets, and (3) stabilizing home prices.
Mr. Tilton claims that "market sentiment was at its worst in late November, with the S&P 50 hitting its low just a couple of days after Treasury Secretary Paulson suggested that he would leave use of any further TARP money to the next administration."
However, since then, there has been a steady stream of positive policy news:
President-elect Obama has nominated several well-respected candidates for economic posts.
Estimates on part two of the economic stimulus package have steadily increased to nearly $1 trillion, by some estimates.
The Fed's move to buy over $500 billion of mortgage-backed securities has caused a 100 basis point (bp) drop in conforming mortgage rates and an increase in refinancing activities.
In addition to the policy response in the United States, officials in other major economies have announced large policy rate cuts and fiscal stimulus packages.
But Will It Work?
Mr. Tilton asks the key questions for the U.S. outlook: "How quickly will these measures help to regenerate growth, and will that growth be sufficient to ward off a pernicious deflationary spiral?"
While Mr. Tilton believes that "in the near term, things are likely to remain tough and the [U.S.] economy appears set to operate well below potential for several years, quite possibly five or more, U.S. equity markets should begin to see upside growth by mid-2009."
Click here to read Mr. Tilton's full analysis.
As always, your questions and comments are appreciated.
Return To Top
______________________________________________________________________
Disclosures
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. The value of an investment in debt securities will change as interest rates fluctuate in response to market movements. When interest rates rise, the prices of debt securities are likely to decline, and when interest rates fall, the prices of debt securities tend to rise. Investments in high-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements. There is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-exempt income.
The opinions in the preceding commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole.
This material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict performance of any investment. Investing involves risk, including possible loss of principal. Investors should consult with a financial advisor prior to making an investment decision.
Diversification does not guarantee a profit or protect against loss in a declining market.
Click Here to read additional disclosures.