As we end an incredibly volatile and confusing 2009 we must all wonder what 2010 has in store! Will the market continue to go up, will we see economic recovery, and if so, when and where? These are all good questions, but there are no hard and fast answers. This month we'll analyze the most important issues and try to provide an outlook for 2010 in a two-part article.
Many agree that the stock market is a good leading indicator of the economy and this may be a great argument. However, we have all seen in the recent past that "bubbles" inflate and tend to violently burst, rather than slowly deflating. The shock waves from a bursting bubble rarely contain themselves to just that particular market or area of the economy and usually will affect many other parts of the economy.
This can be seen with the recent housing bubble which took years to inflate and has had detrimental effects on the entire economy. Is the worst over for housing? That's doubtful. It appears that a large portion of homeowners who have received assistance and adjustments to their mortgages default, on average, within 12 months. This would suggest a continuation of difficulties in the housing market. The bright side of housing is that there are plenty of outstanding opportunities for those able to purchase at this time. Interest rates are good and housing prices are depressed. Banks prefer to get paid rather than carry the debt of good mortgages gone bad. This makes foreclosures very attractive as a long-term investment, as housing prices are bound to rise in value at some point in the future, though it will certainly take time.
Without getting into a complex economics lesson we'll briefly consider the impact across different sectors of the economy that housing has had. Just to name a few inter-relationships that housing has on other markets we should drill down to the very basics of a home; the foundation. This could affect the concrete industry. Then we have the frame of the house; this must surely affect the lumber industry. Then we have the people who work in these industries that may be laid-off or have hours cut back; this will impact the employment situation. Lack of unemployment affects consumer spending. The ripple effect goes on and on, so you can see that a quick economic turn-around is not a simple task and improbable. Just take a look at history and if you believe history repeats itself (or that it is at the very least, a good indicator of the future) then you will understand that patience is key to wealth building.
Over the last several months we have seen a remarkable recovery in the major stock indexes. This has led many to be concerned about an asset bubble. From a technical standpoint, the stock indexes do appear to be inflated or overextended. However, as of this writing (Jan 1, 2010) the indexes appear to possibly be heading into a correction of some sort. This would not necessarily be a bad thing. As markets of any type start to move up everyone wants to get on the party wagon. This may attract short-term speculators and "weak hands". A decline in the markets may possibly rid the market of some of the "weak hands", and attract the more serious "smart money" (bigger players such as mutual funds, banks, etc.).
A pullback in the stock market would be more in line with what the economy is currently telling us too. It would also provide an opportunity for people to enter the market at a lower level, though we cannot be sure that the market will pull back. So what do we do? Unfortunately the stock market carries its risks as most worthy investments do. Diversification and diligent money management are very good ways to enter the market at this point in the game. This is where ETF portfolio construction will make investing in the stock market much more appealing to even those with a low risk tolerance. Constructing portfolios based on the leading sectors, monitoring the chosen positions carefully and if needed, exiting with small gains or losses, should the market not meet our intended goals.
In the next installment of the article we will look at some more economic issues and explore some of the sectors that look poised to do well over the next several months and how we can profit from these sectors!
Happy New Year to all! I welcome any comments or questions regarding this article, so please feel free to contact me anytime.
727-439-0869