Thursday, December 31, 2009

2010 Full of Wishes, Hopes and Fears

I hope that all of my clients and readers of this Blog have had a wonderful Holiday Season and that 2010 will be prosperous for all. As usual, those in the money management business take some time to look ahead and try to figure out what the coming year will hold. Those of you who are long time readers of this blog and my previous newsletter know that I’m not shy about making predictions.

Let’s start with the economy. In October the initial Gross Domestic Product (GDP) was reported at 3.5%. In November it was revised down to 2.5% and the final revision in December GDP was further revised downward to 2.2%. My guess is that if they made a January revision it would be further reduced. I have serious concerns that the economy in 2010 will disappoint and the GDP will be lucky to be in the 1.5 to 2% range. Look for increasing cries for another stimulus program to try to create jobs and push GDP. I think the American people are concerned about the exploding deficit and will be strongly opposed to any new spending programs.

Jobs will be the most important issue of the year and the lack of jobs have had ramifications. With functional unemployment at around 18% jobs will be the page one issue until the election. If the economy hasn’t turned up and we do not see significant improvement in unemployment numbers look for a significant voter backlash and a major power shift in not only in the Congress but look for the president to make a move to the middle. (like Bill Clinton moved to the middle when the American voters changed the balance of power)

I think the Democratic Congress and the President will try and front load as much of the legislative changes in policy as they can before the election takes center stage. The heath care bill may well be the first vote on the continuing power of the president and the current Democratic controlled Congress. I do not know for sure if the health care bill will pass. The difference between the House and Senate seems almost insurmountable but we will find out by mid January.

What is the out look for the markets and interest rates? While the S&P 500 is up about 24% on a year to date basis over the last two years the S&P 500 is off about 23%. I do not expect the stock market to produce another 20% plus year in 2010. A return that was flat to up just slightly would be a great year. There has been a great deal of hope in the returns for 2009 and I do not see them carrying over into 2010. I’m looking for a significant correction in the range of 10% to 15% sometime in the first quarter.

My greatest fear is for the near retired and those people already in retirement. The Census Bureau, which by the way will hire 1,000,000 people next year, currently estimates that there are 72 million baby boomers and 32 million people over the age of 65. The boomers have experienced the “Lost Decade” for stocks. The first decade of the 21st century saw the return on the S&P 500 have a negative total return of 23%. The retirement savings of this over 100 million people has been adversely impacted and jeopardized the retirement security of this large segment of America.

The historical decline of interest rates especially short-term savings rates is causing this group of Americans to start spending principal well a head of what would be normal in retirement. I expect this problem to become more acute in 2010 as many of the higher yielding CD’s will be replaced at interest rates one third of the older CD interest rate. As long as unemployment continues above 8% I can find no reason why the Federal Reserve will start raising short-term interest rates. If I’m right that short-term interest rates will stay close to zero well into 2011 then look for increasing examples of retirees being subject to fraud because they are desperately looking for higher income to survive.

The key for survival in 2010 will be income. I expect income producing investments to be in increasing demand throughout all of 2010. If you need income to pay your bills and the cash flow from your investment is meeting your needs then don’t worry about the changes in the price. For my clients who needed income over the last 16 months got their checks. Yes, their principal went down but it recovered. I do think they will see some volatility but I think their income is secure.

One final thought: Look at how much risk you have in your portfolio. See how much of your money is in income producing assets and what percentage of your assets you have in common stock. Take any opportunity in the beginning of 2010 to rebalance your assets towards income assets; you’ll have less downside.

Dan Perkins

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