Monday, January 12, 2009

2009: Its Going To Be Bumpy

Everywhere I go people are asking me what's going to happen with the stock market. My answer is the same as it has been for about a decade, I don't know. In the short term it is going to fluctuate, in the long term I believe it will rise. This answer for most seems ridiculous, however it is the only honest answer that can be given.

While I don't know where the market is headed in 2009 my gut tells me its not going to be a good year for stocks. I think you should prepare for the possibility that they could drop another 20%. It may not happen, in fact we could see stocks up 20 - 30% by year's end - I just don't know. What I do know is that the American and the global economies have some major problems to deal with and many of those problems are still not addressed.

For one thing, residential real estate is still going down in value. A home valued at $560,000 in Murrieta in February of 2007 is now valued at less than $200,000. A drop that is nearly unbelievable. Housing in many area's has turned out to be like tech stocks. The worst part is that the houses still are not clearing (selling) at these levels and 2009 - 2011 promises more will be dumped on the market, potentially depressing prices even more. My street alone is down over $5 million from purchase price (16 homes all bought in 2004). The banks are ignoring this problem. Don't believe what you read in the papers about banks working with borrowers - they are not. When they do they are only lowering interest rates and in some cases doing so only for the short term and then adding interest to the back of the loan. The banks for one reason or another don't seem to realize that they will lose less money by renegotiating the loans than allowing them to short sale or foreclose. The banks must turn into a mode of "losing less" or else the problem will continue to get worse. Without real estate being fixed, the economy cannot move forward.

The recession we have entered could be long and it will be very painful, there is just too much to clean up. This doesn't mean the stock market won't start recovering before the recession is over, it will, it always does, but that might not be until 2010 or later. My hopes are that it will be sooner, but letting hope overrule reality is a recipe for disaster.

Contrary to the negative tone of this post, I am long term optimistic. Innovation will drive this economy back to previous highs and beyond. We are the most innovative nation in history and we will continue to be.

I did not foresee much of what has occurred in the past few months, despite being very vocal about a housing bubble. The one thing that I missed was the egregious issuance of credit to those who never, ever had the ability to pay it back (well, I noticed it, but didn't realize the scale).

Some are asking if we should get out of the market, especially if it could fall further. My answer is that I believe that to be a bad idea. The only thing more difficult than figuring when to get out of a market, is when to get back in.

In conclusion, 2009 and 2010 may end up being terrible years for the economy, the stock market and housing or they could turn out to be ok, I don't know. What I do know is that the patient, long term investor will be rewarded for sticking it out during the tough times. Keep your head up, its not all bad news out there, we'll get through this like we get through everything else......and we'll be stronger for it.

Scott Dauenhauer CFP, MSFP, AIF