2008 is almost in the books (thankfully), so it is time to make predictions for the upcoming year.  I am a little anxious about looking so far into the future when we still have 27 days left in 2008 (as of 12/03/08)---27 days feels like an eternity in this environment.  But what the heck, here are some predictions for 2009:

The Federal Reserve and Treasury

Here’s a no brainer, but one with many potential implications for the months and years ahead--The Fed will continue to expand its balance sheet (i.e. pump more into the economy through traditional and unconventional measures) in an effort to bolster bank lending and consumer purchases.  (Grade A+, but as stated, this was a no brainer).

Mortgage Rates

Given recent and probable Federal Reserve/Treasury actions, 30 year mortgage rates will fall to 4.5-5%.  This will be a positive force in assisting the housing market in finding a bottom, but unfortunately, there is no significant rebound in sight.  (Grade A+ as rates are currently a little under 5% and there is still no significant housing rebound in sight).

Banks

The large banks (deemed too big to fail) will take further writedowns as credit card delinquencies rise and some commercial real estate loans go bad.  Either by way of more direct injections from the Treasury or through additional issuance of government backed short term bonds, these banks will have to be recapitalized before being able to lend again.  (Grade B+.  Banks were recapitalized, but most writedowns were due to soured home loans.  They have yet to start lending again).

The Consumer

The average consumer who has relied on debt to fuel their spending binge will continue to retrench.  They will have no other choice---concern about jobs, credit scores below 700, credit card companies pulling in lines of credit, little or no home equity, and very little savings.  (Grade B+.  The consumer is still retrenched but actually has spent a little more than what I expected this time last year).

The dollar

The dollar will remain strong until we can see the light at the end of the tunnel.  Thereafter, the dollar will once again weaken, possibly significantly.  (Grade A.  The dollar was strong and actually rallied into early March.  Since then, the dollar index has fallen by approximately 14%).

Treasury Bonds

Treasury yields are at their lowest level in 50 years, and could possibly go lower.  However, at some point in the future (when things start to feel a little better) they will be sold off in a manner similar to the way stocks have been sold off this year.  Some investors who want out will take a loss on an investment they deemed to be the safest place to be.  (Grade B-.  Treasury yields did go lower through early March, but have since settled into a range much higher than their march lows, but still far below where they will most likely be sometime between 2010 and 2012.  In other words, I believe I have this prediction right---it was just a little early).

Gold

I may be a little early on this one, but gold will regain its luster and will clip $1,000/ounce in the first 6 months of 2009, and possibly $1500 in 2010.  (Grade A- due to current price of gold at 1125, higher than expected.  No comment or prediction for the $1500 price tag in 2010).

Oil and Commodities

I am running out of space, so I condensed this one.  The great sell off in oil and commodities will soon end.  Both of these natural resources will start a new upward trend late in 2009.  Barring any significant geopolitical events, oil will settle in the $50 range in 2009.  (Grade B.  Concept and price direction were right on target; strength of commodity rally based on falling dollar and liquidity, and the timing of upward move were underestimated).

The Economy

Given global efforts and comprehensive policy responses, as well as social programs to assist struggling families during this time, a great depression will be avoided.  However, the recession will last into Q3 of 2009, and any ensuing recovery will be anemic for at least several quarters thereafter.  (Grade A, so far.  Depression was avoided, and recession probably ended in Q2 or Q3 2009.  Time will tell regarding the strength and length of recovery).

The financial markets

This is what everyone wants to know, right?  The truth is that my crystal ball is no better than yours so allow me to hedge my bets here.

Corporate Bond Market

The corporate bond market will show signs of healing before a sustainable and substantial recovery takes place in the stock market.

First half of the year

As 2008 winds down, the hope associated with President Elect Obama’s personality, as well as anticipation of a significant stimulus package, will serve as a floor under equities.  But even before he takes office, companies will begin announcing results for the last quarter of 2008, and they will be ugly---so there are competing forces.

Tie breaker goes to company guidance for calendar year 2009.  If very weak or unclear, bears will win in short term.  If neutral to positive, bulls will win and the market will rally (length and strength of the rally will be a byproduct of where the market is before these events occur---a rally could materialize in advance of this).

Volatility will continue through at least February, if not a few months longer.  (Grade A+).

Second half of the year

This is a long shot prediction into what seems an eternity---The market will trend lower (assuming it has rallied) to current levels during Q3 and first part of Q4 (October) before finishing the year at 1050 on the SP 500 (23% above current levels as I write this).  (Grade A for the SP 500 prediction by year end.  There is still time for movement to the upside or downside, but as I write this, the SP 500 is at 1100).

Disclaimer

Obviously, don’t make investment decisions today based on my stock market or other predictions---do your own homework. In this environment I prefer to remain nimble and keep some powder dry in case even better opportunities are presented in the market.  It still isn’t the time or place to “go all in”---sometimes it is better just to be able to play another day).

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