Now that 2009 stock market results have been tallied, it is time to look ahead and plan for 2010. This is my prediction for the year ahead in some of the key economic areas and specifically with investment assets. What you get is a viewpoint of someone who has made mistakes and enjoyed good fortune in varying doses and in different years. My career has not been supported by my investment prowess, but it has centered on a financial environment in my capacity of advising senior executives of public companies and people of great wealth, both inherited and gained from hard work and some level of luck, on financial matters.
The focus will be primarily around the U.S. economy and U.S. assets. For the economy, there will be four major areas to keep an eye. These are the Federal Reserve’s policy on interest rates, employment levels, the real estate market, and specifically new construction which impacts employment as well as commercial real estate, and lastly consumer spending. Each of them is a barometer of what might happen to the stock markets and your balance sheet.
We have been in a period of low interest rates and scarce credit. This has constrained economic growth and impacted investors especially older ones who rely on fixed income derived from safe investments like Treasuries and Bank CDs. 2009 will go down as one of the worst years for folks who were out of the market and relied on these type investments as the cost of living index while low ate up whatever returns they had and likely resulted in negative overall returns. I think that this will be unchanged in 2010 as the Fed has to work in some level of coordination with the Administration in giving a boost to the economy and raising rates is a step in the wrong direction. I do expect that there will be as easing of credit for business and investment as the banks will be incented and pushed to lend more. For community banks, there will likely be positive changes in the SBA Program that will help lending to small business.
I expect the labor market to stabilize and begin to see positive statistics in new hiring in the 3rd quarter. It is hard to imagine it getting worse, but it will continue to be a difficult market for college graduates who enter the work force as entry level jobs in many industries are scarce. One of the big changes that I expect the Administration to undertake is an expanded jobs growth directed tax credit. There are jobs tax credit programs in place now like the WOTC, but these need to be made richer. I expect that the Administration and Congress will pass meaningful legislation in this area in the 1st quarter of the year.
The real estate market will struggle until there is real growth in employment. New construction will be sluggish and existing home sales, especially at the higher levels will be slow. A big problem area is the commercial real estate market where there are a huge number of projects that will need to be refinanced in 2010 and 2011. In many of these cases, I expect the lenders to foreclose as the owners will not have the cash flow or additional collateral to satisfy the old or a new lender. This will depress values and investors as well.
This brings us to the last part of the wheel – consumer spending. This is the engine that drives a lot of what happens in the country. Our Federal budget is based to a large degree on collection of individual income taxes. If consumers are unemployed or hoarding their money, they will spend less and this ripples through to business which produces less. Likewise, if people are out of work, they don’t pay taxes which impact the Federal and states budgets. I believe that this key factor will follow the behavior of the employment picture. It will be anemic for the beginning of the year, but will increase as the Obama administration executes its plans to support and stimulate job growth.
This gets me to the question of what does an investor do in an uncertain climate like this. In my mind, there are several overarching principles that apply:
- Be diversified with your investments
- Have some portion of your money in the market – if you are young (I’ll let you determine this age), I would have 50% invested; if older, then I would have 25% as a reasonable benchmark & in each case, I would have a portion in foreign stocks or funds;
- Have a portion of your money in investments that generally run counter to the market’s performance like gold and commodities; and
- Maintain a cash reserve
My best guess for some of the important indexes on a yearend basis is as follows:
- S & P 500 – a gain of 10% with a lot of choppiness in between
- Gold – flat as inflation will be tame and a lot of money has already bid the price to a high level
- Oil – a gain of 10% due to global disturbances
- Dollar – continued weakness that will persist until the deficit is under a level of control and the Fed raises rates
Finally, let me share my 3 top stock picks for the year:
- Apple – (AAPL: NASDAQ) it will increase its penetration into the consumer market with its new tablet while the iPhone continues to get better and more ubiquitous
- Google – (GOOG: NASDAQ) their franchise will grow at the expense of Yahoo and Microsoft and the modest increase I foresee in online ad revenue
- SonaBank – (SONA: NASDAQ) this is a solid well capitalized community bank based in a very strong market of Northern Virginia with a highly experienced management team that has a proven track record of successful acquisitions and recently completed the takeover from the FDIC of the 1st Virginia bank to fail since 1994 (I sit on the Board of the Bank and own stock in the Company)
I believe that this will be another turbulent year, but I think that a diversified investor with a few contrarian bets will beat inflation by 5 points or more. With a guess that inflation will run at 2.5%, my target for myself is 7.5%. I will let you know how I do.
NOTE: The writer is a retired PricewaterhouseCoopers partner and a C.P.A.