For investors, 2008 will be a tough act to follow—and that's probably a good thing.
photo: Oliver Quillia
NYSE trader
The year saw a historic collapse in the financial sector, sparking a contagion that swept through the entire market and wiped out a third of the market value in the Dow Industrials.
So for 2009, investors are hoping for a return to quieter, happier times, when the market's moves are more predictable and they can go back using more tried-and-true formulas to decide where to put their money.
They may not find everything they're looking for.
The year ahead is expected to feature substantial volatility. Investors looking to play entire sectors could get whipsawed by more dramatic swings in the indexes. As the recession stomps its way through the economy, there will be at least as many headwinds as tailwinds blowing through Wall Street.
Conversely, those with an eye toward a sort of conservative creativity could find plenty of opportunity.
"In terms of investments, we're assuming that 2009 is going to be a poor year for stocks," says Peter J. Tanous, president and director at Lynx Investment Advisory in Washington, D.C. "At the same time we're looking at investments you could make today in high-income vehicles yielding 8, 9 and 10 percent that have nowhere near the risk of common stocks but bring common-stock returns."
Indeed, 2009 could be a banner year for the corporate bonds of companies with strong balance sheets and solid outlooks.
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Investment advisers say they'll also be looking at exchange-traded funds to play sectors that will rebound, but generally warn against moves that are overly broad and include companies likely to underperform. They'll be focusing on the direction President-elect Barack Obama will take the country, with an eye toward capitalizing on his plans to boost the economy.
Meanwhile, convertibles and preferred stocks also are likely to benefit as investors continue to shy away both from risk and the unattractiveness of anemic-yielding Treasury debt yet still look for places to put money to work.
In fact, if 2008 was the year the stock market went bust, 2009 could be the year the Treasury bubble pops.
"I think the big trade in 2009 will be to go short Treasurys massively," says Marc Faber, author of the Gloom, Boom & Doom Report and often referred to by the sobriquet of "Dr. Doom."
"I really mean massive, because we may not have inflation for one, two or three years, but I don't see how the Fed can ever again tighten monetary policy to the extent that the Fed funds rate will be above nominal GDP growth rates and above inflation."
With such a slew of influences whirling about, the year ahead, then, paints a complicated roadmap of how investors can retrace the value lost in 2009. It is a path unlikely to follow a straight line.
Obama Rally?
The first big indicator for the market will be the extent to which Obama can help restore investor confidence.
AP
President-elect Barack Obama
Obama takes office Jan. 20, and investors across every asset class will be looking to answer one question: After a campaign highlighted by repeated criticism against Wall Street greed and promises to soak the highest wage earners and top-performing corporations with taxes, will Obama recant and cast himself as a pro-business CEO/president?
"We need to see what the new administration plans on offering as far as tax proposals are concerned," says Quincy Krosby, chief investment strategist at The Hartford.
If the new administration backs off its tax-hike plans and takes real steps to help business, it "would be a very strong positive for the market because that doesn't go into the category of a stimulus," Krosby says. "Real bull markets need something transformational--a good pro-business background is important for a secular bull market or structural bull market to form."
What analysts will not demand in 2009 is more ineffective stimulus ideas such as those that proliferated during 2008.
After each Federal Reserve interest rate reduction, each policy speech from either Treasury or White House officials, each announcement of this or that fiscal stimulus or monetary easing, the reaction was the same: A brief rally followed by a resounding thud of no-confidence.
"You've seen that one-off events don't work. The market rallies up and then sells off afterwards," Krosby says. "The impact of a pro-business stance would come as a surprise for this market. It would be greeted as a strong positive signal that this administration has a pro-business leaning and understands the importance of business for the overall economy."
The Long View: Credit Spreads From there, investors will square their gaze on how the market reacts to whatever first steps Obama takes to heal the economy. While trying to find predictability in such an unpredictable market is a futile exercise, there's a clear consensus that credit spreads--in particular the difference between lending rates and the returns on Treasury bills--will point the way towards whether the economy is ready to recover. "Historically it's been very hard for an equity market to rally without credit spreads tightening, and we are looking for credit-spread tightening," says Brian Gendreau, investment strategist with ING Investment Management in New York. "Credit spreads coming down would be a sine qua non. That has to happen for the markets to go up." When the cost to lend gets closer to the yields for the safety of government debt, that encourages lending. The lack of available credit in the market is widely considered the biggest impediment to get the current economy rolling again. In what could be the best-case scenario for the market, credit spreads indeed will tighten as the new year progresses and the Federal Reserve's bold moves of 2008 perhaps finally start making a real difference in the market. At that point--perhaps around the end of the second quarter when the mid-year earnings reports start coming out--the market could be poised for a substantial rebound that goes beyond a bear market rally. "We're now seeing historically low interest rates," notes Rick Pendergraft, market analyst at the Investors Daily Edge newsletter. "That combined with the moves by the Fed--we're going to see a strong market, a strong bounceback in 2009." Others, though, are taking a bit more cautious view. "My personal view is we bounce around the bottom for a while. Thinking that a sustained rally, rather than a bear market rally, will start at the turn of the year, given the sheer volume of bad news, is a little too much to ask," Gendreau says. "My guess would be sometime before the end of the first quarter the market will start smelling a recovery and then that will be the beginnings of a sustained rise." Tomorrow: Investment Strategies for the New Year.
