Given accommodative fiscal and monetary policy, we believe that stock valuations are reasonable at current levels. However, we do see an increasing likelihood of a short term market pull back early in the year. As such, since we believe the stock market will be up in 2010, we intend to be opportunistic in our investment choices, and are looking for additional entry points over the next several months.
Our nations’ economy will continue to be pulled in two directions. Although we see GDP Growth exceeding the consensus estimates of 2%, we do not believe there will be a significant increase in consumer spending, availability of credit or a turnaround in the housing market which is needed to sustain a long-term economic recovery. Given this outlook, we believe that the Federal Reserve will keep interest rates at current levels through the end of the year (we may see a ¼ % rate hike in the fourth quarter). Europe is in a similar predicament – albeit with different underlying causes – and will stagnate in the coming year. There is increasing risks that the European Central Bank will overreact to short term inflation readings, and raise interest rates too rapidly. This will create a further tightening of credit markets in Europe and may cause a return of the just passed recessionary environment on the continent. This, in our view, would lead to a rally in the US Dollar – most likely next summer. (Although structurally, we believe that the Greenback will continue its long-term downward trend). Asia on the other hand, is likely to flourish. China and India will lead the way. However their markets are likely to be very volatile. Additional investment opportunities will present themselves in commodity rich economies such as Australia, Indonesia and Thailand. A worldwide supply shortage in food, energy and raw materials will drive commodity prices higher and help these economies flourish. Concurrently, this will cause “headline” inflation numbers to be increasingly volatile and create the appearance of actual inflationary pressures. However, wage growth and job creation in the US is unlikely to create actual real inflation. Given these points, we believe that the Fed is correct in estimating that we are on a fragile path to recovery, where some earnings disappointments are likely over the next year. The bottom line is that we are in recovery mode and the boom years will return – just not very soon.
Given this outlook, the clear challenge for investors is striking the balance between safety and security, all the while having sufficient market exposure to participate in the forthcoming bull market. This will continue to require a more agile approach to investment selection coupled with a disciplined approach to managing portfolio volatility and risk. This, in our view, will require the skills of professional money managers who have the appropriate tools to navigate this complex environment