2009 Economic/Market Forecast

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With the current tough economic times we are experiencing I think it is appropriate to discuss the economic/market outlook for 2009. I don't claim to be an expert except many decades ago I did receive a bachelors degree in economics. I would like to share here the wisdom of Dr. David Kelly with some embellishments. He is the chief market strategist for JP Morgan. He made a presentation to the AICPA Advanced Personal Financial Planning Conference last week that I attended.

Dr. Kelly said that we are in unprecedented times. He pointed out 3 areas as follows;

1. Market Volatility - the markets have never been so volatile (ups and downs) on a daily basis over a 3 month period at the end of 2008. The average swings were over 3.3% each day for a 3 month period in the US Stock Market. This has never happened before. The individual investor left in a panic and pulled out billions of dollars. Their emotion ran a muck and they left in a herd.
   
2. Government Response - no recession, not even the great depression, has seen the response of the federal government through monetary and fiscal policies. The fiscal policies are just now being considered with the potential deficit climbing to over 1.5 trillion dollars. Will this work? There is no history to look back on to provide guidance. He calls this stimulus the "fiscal sledgehammer".
   
3. Global Nature - we are one small world now with all economies shrinking at once. There is no protection from abroad in fact international economies are having a much harder time than we are having, if you can believe this.

The economy is currently on life support but with the injection of the government stimulus drugs the patient will stabilize and come back to life and prosper. No one knows when this will happen but it will happen. Unemployment will continue to increase and company profits will decrease until they are compared against the weak performance of last year. What history shows us is that the stock market is a leading indicator of the economic rebound and anticipates the turn around about 4 1/2 months before it happens. Unemployment is a lagging indicator of the economic rebound trailing the recover by about 5 months so don't get too bummed by the increasing unemployment numbers unless you are one of them.

History has shown that the deeper the recession the great the rebound. Take solace in knowing the worse the recession the greater the recovery. I liken this to a ball. The harder one throws it against an object the greater the rebound will be. When the economy does recover the markets will advance sharply and quickly so if you are out of the market you will miss a major part of the advance.

The US economy has the ability to grow by 3% a year due to productivity and worker gains. This potential won't go away. This is why in the last 50 years the economy has been in an expansion 86% of the time. The expansion days will return and the economic business cycle will start over again.

But before this can happen the average investor must get over fear and greed. Once their confidence comes back they will get back into the market but until then it is the institutional investors by default.

Dr. Kelly expects the US to led the world out of the recession and balance funds through diversification are still the way to go. Invest broadly and when the tide changes be there to experience it, see the results of assets classes in the above image. Balance is the way to go in the long run.