Insights & Advice

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Auld Lang Syne to 2009

Now that the remaining days of 2009 have come and gone, there’s little to say about this year’s Christmas Rally. It appears Santa was a might stingy as far as the stock market was concerned.

We did hit new yearly highs, however minor they may be. The paltry volume left most investors wary of making too much of these gains at least until the coming week. The buzz from traders is if the ‘players’ return from the holidays and bid the markets higher, well then the move up over this last week or so will be confirmed and next stop should be S&P 500 level 1,150, and after that 1,200.

The S&P broke 1,120 with no problem, which was a good sign. It went on to reach 1,130 before profit-taking set in this week. On a short-term basis (meaning over the next two or three weeks) we may see the index hit 1,150 and then pull back before moving higher. As such, it could simply be a continuation of the recent past where investors buy on the dip throughout the first half of 2010. Even today there are many investors who are still waiting for a big correction and a chance to get in the market at a more reasonable level. So the most inconvenient thing the markets could do for the most number of people is to continue to move higher. Technical data appears to support that view.

On the economic front, the major uncertainty that most investors face is what will happen when the government stimulus ends. Will the private sector pick up the slack? If they don’t, will it bring on a double dip recession?

I think those worries make great television debates but have little to do with the facts. The facts are that less than a quarter of the government’s $787 billion stimulus package has been spent. The reason is both simple and cynical. There are political elections in 2010. The party in power has been waiting to spend that money where it will do the most good (i.e. on electing or re-electing the most democrats possible through pork barrel spending). Welcome to Introduction to Washington Politics 101. If the shoe were on the other foot, a Republican administration would take the same tactic. Bottom line; expect more, not less, government stimulus in 2010.

That spending should keep the economy chugging along at a steady but modest rate of growth. In turn that should help propel the markets higher at least into May. At that point we might get hit with a bigger correction that lasts through the summer months. What could cause such a drop in the averages? Higher interest rates, valuations that get out of hand on the upside, fear of inflation, any number of things could give the markets an excuse to sell off.

On the inflation front, I don’t really think we have much to worry about yet. This recovery has been anemic and nothing I see points to anything more than a slow growth recovery this year. That is not the stuff of rampant inflation. You can pump all the money you want into the system, but if it is not being used, the velocity of money stays low. Only when that money begins to change hands (turn over), for instance in making loans or buying houses, autos, televisions and building new factories does velocity increase and inflation begins to take hold. We have nothing like that yet and won’t, in my opinion, for a good part of 2010, if not longer.

I would also like to point out that this has not been a very good decade for the stock market. If you had practiced a buy and hold strategy, you would have lost money over the last ten years, which is why we should bid adieu with some relief to both the strategy and the decade. Historically, there have actually been three decades in the 20th Century where stocks have suffered losses over ten years, ending in 1939, 1974 and 1982.

The good news, in all three instances, was that the following ten years were volatile but great for stocks if you had a buy and sell philosophy. We expect that in this century the same pattern will hold true. So 2010 should be the beginning of something quite positive for all of us. That should make for a Happy New Year.

Posted in A Few Dollars More, At the Market