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David P. Kelly: What's On The Investing Horizon

Short-term forecasting has never been more difficult as an unprecedented financial crisis is being met by an unprecedented government response. Monetary policy has been ineffective at turning the economy around, but the sheer scale of the fiscal stimulus may be enough to start the economy on the road to recovery.

Best case scenario: The economy sees another big GDP decline in Q1 but begins to grow slowly in Q2. It doesn't feel like a recovery until the end of the year as unemployment keeps rising past 8 percent.

Worst case scenario: The economy sees multiple negative GDP quarters this year with improvement delayed until 2010 and unemployment peaking between 9 and 10 percent.

For investors:

  • In the short run, make sure you have high quality assets. As the economy begins to turn, high-yield and other corporate bonds may begin to improve before stocks although, over a 5 year time frame stocks should handily beat bonds.
  • Treasuries are vulnerable to a certain increase in supply and a possible surge in inflation, if the economy turns too quickly.
  • Residential real estate looks cheap - now may be the time to buy that vacation home in Florida.
  • Large-cap growth stocks look like the cheapest area of the stock market. Health care looks like the most promising sector.
  • Looking at commodities, metals and agricultural commodities continue to look vulnerable because of the global recession although supply issues suggest oil may move up over the next five years.
  • Check your asset allocation to make sure its still appropriate given both changes in your overall situation and changes in your allocation caused by the fall in stock markets.
    A normal allocation to international seems appropriate, as the cheapness of overseas stocks is offset by a potentially rising U.S. dollar in the next few years.

Have a question for David? Use the form below to submit your question, which could be used on Thursday's Town Hall airing on Power Lunch at noon, ET.

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