2010 Outlook – Does Optimism = Recovery?
By Randy D. Lewis, CFA, MBA
Senior Analyst, EquityNet Research
January 11, 2010
As we start a new year, not to mention decade, thoughts and discussions turn to what lies ahead for our economy and the financial markets. Many investors and the professionals that serve them – money mangers, brokers and investor relations consultants – take a shorter-term view and are generally concerned with the near future, though many would not admit it. Though with the worst global recession since the 1930’s and the associated fallout, it’s hard to blame them.
One cannot argue that last year’s market statistics were amazing. Since the March 2009 low, the Standard & Poor’s 500 index roared back 65 %, the largest gain since the Great Depression. For the full year, the index rose 23.5%, the best showing since 2003. So why can’t we keep it going? Isn’t the market a leading indicator of economic recovery? Now that our 401(k)s are back, can’t we begin spending?
It seems every year starts out the same way, but this year it’s magnified. Article after article, blog after blog, there is optimism all around us. I read about M&A activity picking up, improved company earnings and the market having another good year (though not many expect it to finish off like 2009) almost every day. But can this optimism really carry us out of this mess? For some reason an old adage comes to mind: “You cannot think yourself into right action, you have to act your way into right thinking.”
Believe me, I like optimism as much as anyone, but we need to be realistic as to why an economic recovery might take a little longer than we think or hope. And just as importantly, why the stock market might not be a good predictor of our economic condition. Though the recession may be officially over, there are four major reasons to be cautious in the year ahead.
1)Unemployment – There does not appear to be any good news on the employment front. The Obama adminsitration, as well as some states are discussing job creation strategies. But all of these things depend on money that isn’t really there. And second, the trend is still down overall regarding employment, though specific regions of the country are faring better than others.
2)Home Foreclosures – Most analysts and economists say that we are in for another large wave of foreclosures, as more adjustable-rate mortgages (ARMs) reset this year. Though some areas of the country on the surface seem to be recovering, this cannot bode well for the already-tight credit market and real estate values in general.
3)Net Saving – Though the country may seem to be controlled by “Big Business”, it is the collective consumers that drive growth. Consumer demand is the catalyst that drives business, and without it, a recovery is nearly impossible. Because of #1 & 2 above, the average consumer is saving more and spending less.
4)Higher Interest Rates – Few expect interest rates to stay where they are, and in fact, many believe that the Fed has artifically depressed them to the detriment of the economy. I believe it is almost certain that rates will rise as demand does pick up – whenever that is.
The list could go on, and many readers might have their own thoughts, but these are the main drivers in my opinion. The companies that will perform the best in 2010 have solid global operations, will cut costs and will form strategic partnerships for added strength and stability. As for the stock market, the earnings will speak for themselves, but it will also be up to the investor relations professionals to keep investors informed in a timely, accurate manner.
Randy Lewis, CFA, MBA is founder and senior analyst at EquityNet Research, a boutique investment, industry and economic research firm. He is also founder of The GSL Group, LLC, a company focusing on private business valuation and advisory.
