How bad was 2008 from an investment perspective? From Barrons issue on January 5: "The S&P 500's 37% loss of 2008 served to knock three-quarters of a percentage point off the annualized index total return since 1927, to 9.7% from 10.4%, according to Aronson+Partners. The 10-year trailing returns for large-cap stocks now appear to be at their worst level since 1827, says Morgan Keegan, and trailing returns of world equities versus bonds are at their weakest since the late 1970s, says BCA Research."
So, combined with the Tech Bust in 2001-03, we could say we are simply in the worst period for investors in 200 years. We should have "mean reversion" at some point. It has to get better!! The article goes on to say: "the lousy risk adjusted record for stocks that now dominate investors' memory is discrediting equities in the public mind as a wealth-building asset class." For those with a 20 year time horizon, this is what we want to hear. I was very worried a couple years ago when volatility had gone to less than 10 (as measured by VIX). Low market price volatility goes with a perception of low risk. When the market loses its risk, it also loses its prospects for return.
For the stock market to achieve its typical 4-6% real return (the return above inflation), there must be a perception of risk. If there is no risk, then returns will be only 1-2% over inflation (see TIPS returns as an example), and the ability to grow wealth by market investing will be lost.
Santoli goes on in his Barrons article: "This is helpful, and implies the direction of mean reversion for asset classes will favor stocks again before long, though who knows from what ultimate level? The five years following the 10 worst calendar years for stocks were always up in total -- sometimes not much, sometimes a lot, an average of about 10% annualized -- yet three times the year immediately afterward was down more than 20%."
All this is good and sounds very reasonable. But the title of this post is "Projections for 2009". I know you are looking forward to my annual amusing, but rarely insightful projections. I understand that by January 4, you have already seen more than enough forecasts. But I have been doing this since 2002 now (except last January when my crystal ball was all cloudy), so I don't want to break the string (though I just admitted I did last year). Here goes:
- Government backed interest rates (mortgages and Treasuries) will stay low throughout 2009 (less than 1% for 2 year bonds); but sometime thereafter, maybe early 2010, they will start rising and continue going up as inflation heats up along with an economic recovery.
- By the July 2009, the high yield and corporate bond interest rates will begin to decline, narrowing the historic spreads against risk free Treasuries
- Crude oil will continue weak throughout 2009 in a range of $25 -$60 per barrel; as a result production and exploration will be reduced and lower production with higher demand will set the stage for a rebound to over $100 sometime in 2010 or 2011; enjoy low gasoline prices while you can;
- Gold prices will stay under $1000 in 2009, but will not decline under $600; but gold could increase to over $1500 by 2012 because of a weaker dollar caused by inflation from excess money supply created in 2009;
- In early 2009, GM will be forced to declare bankruptcy (or an equivalent government reorganization); same for Chrysler; this will set the stage for a revamping of the American auto industry and will usher in a new era of manufacturing competitiveness; Ford will escape bankruptcy, but will benefit from the changed labor and franchise rules;
- At least five major mall retail brands will declare bankruptcy and will be closed; candidates: Abercrombie, Zumiez, GAP, Hot Topic, Lane Bryant, Foot Locker, Eddie Bauer, Ann Taylor; but look for the retail sector to outperform as soon as 2010;
- General Growth may become a victim both due to the above store closings / bankruptcies, but also due to the debt it took on to acquire Rouse Companies; its survival depends on selling several of the Rouse flagship properties: Fanueil Hall (Boston), Harborplace (Baltimore) South Street Seaport (NYC) and its Las Vegas malls (Forum Shoppes, Fashion Mall, Highland Mall);
- Official unemployment will top 8%, but will not top 10%;
- Mortgage rates for 30 year fixed rate Fannies will be less than 4.5% with no points; but these rates will rise in 2010;
- The stock markets will see a range and return by year end of DJI: 7000 - 10,500 (13%); S&P500: 725 - 1100 (15%); NASDAQ100: 1400 - 2200 (10%); with the lower end of the range reached in the first half of the year (there will be a retest of the November low, but that retest will be the bottom of a new 20 year secular Bull market, albeit the new Bull will be sleepy for several years while the economy and debt are repaired);
- The best asset class return in 2009 will be in high yield bonds (junk) with a 30% total return;
- The 2nd best asset class return in 2009 will be in energy stocks, both producers and equipement providers, though producers will have the best total return at 25%;
- The worst asset class in 2009 will be Treasuries with 30 year bonds returning a negative 20%;
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