by Russ Wiles - Dec. 28, 2008 12:00 AM
The Arizona Republic
A little less excitement, please, in 2009.
The financial markets, and investors, could use the time to regroup.
Big-name business failures marked 2008, not to mention a stock-market crash, partial government nationalization of the banking industry, an automaker bailout, layoffs, a credit freeze, a collapse in oil prices and near-Depression-like housing conditions.
Nor is it common for the economy to spend a full 12 months in recession - something that hadn't happened since 1982.
With all that in mind, here are some trends to watch in 2009 - factors that will influence the tone of the investment climate:
• The "shape" of the recovery.
Economists generally see the recession ending in 2009, but the timing and strength are up for debate. Optimists hope for a solid, V-shaped rebound, while others foresee lingering softness and L-shaped action. And there's always the chance for false starts and whipsaws along the way, that would generate a W- or S-shaped pattern.
Regardless, it will be tough for the economy to make headway without housing-price stability, rising consumer spending and a lot more hiring.
• The degree of fear.
Consumers have cut back, businesses have laid off workers and investors have fled to the sidelines.
Many people are so nervous they're willing to accept near-zero returns for the privilege of parking their cash in ultraconservative Treasury bills, bank CDs and money-market mutual funds. They're shunning not only stocks but corporate and municipal bonds, too.
"The market is effectively pricing in a depression today, where investors expect default rates to rise substantially," said Michael Roberge, a senior officer at MFS Investment Management in Boston.
Yet confidence eventually will return, and when it does, today's safe havens won't look as attractive.
Roberge predicts that investors who have piled into Treasuries will regret it sooner or later.
• The inflation/deflation tug of war.
It's usually a safe bet to assume consumer prices will rise. But the recession, collapsing commodity prices and other signs could make 2009 the first deflationary year since 1954.
Deflation anxiety explains why many investors have piled into default-free Treasury debt. But you could also make the argument for much higher inflation ahead, given recent interest-rate cuts and other stimulus tactics.
"There are so many diverse outcomes," said Stephen Barnes of Barnes Investment Advisory in Phoenix. "It makes it hard to build a portfolio."
How this battle unfolds will be of key significance.
• Strength of the dollar.
It's ironic that the global recession was brought about largely by a U.S. problem - housing. Yet some foreign economies have been hit worse and their financial markets and currencies shredded.
Recent strength in the dollar reflects the safe-haven role of Treasury debt. Look for some greenback weakness in the months ahead as confidence slowly returns. As long as the move is gradual, that should be welcome all around.
• Credit conditions.
Too much easy lending in prior years got banks, borrowers and ultimately the economy itself in trouble. The pendulum then swung too far the other direction in 2008, with some credit markets shutting down completely.
So look for backing and filling to a more normal lending pace in the months ahead, with loans still off-limits to people with poor credit records but available to most everyone else.
"Borrowers with good credit scores and a payment history will be able to get loans," said Mariner Kemper, chairman and CEO of Missouri-based UMB Financial Corp.
• Stock market stress.
The year's headline-grabbing developments showed up most readily in the stock market. Stocks gyrated through 28 daily swings of 4 percent or more - mostly losses - during a 10-week stretch from mid-September to early December. In the past quarter-century, there were only 25 daily swings of such magnitude.
Stocks aren't likely to suffer anything close to a second straight yearly drop around 40 percent, as happened in 2008.
But investors won't start feeling better until the market sheds its casino image, and that will take a while.
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