The folks at Seeking Alpha asked me to give them some thoughts on
what 2010 might look like for investors. In all deference to that
Chinese proverb, these have been interesting times and are likely
to remain interesting a little while longer.
In a similar article about what 2009 might look like,
that we would be in for a massive rally. That article drew 100
comments, which is by far the most for any post or article I've
ever written. The general tone of those comments was to call me an
idiot for thinking a 30-35% rally could be in the offing. Part of
the logic there was that often after big scary declines that
threaten the future of civilization as we know it, there is an
enormous rally. The Dow Jones Industrial Average went up about 75%
over one stretch in the early 1930s, so while I could have been
totally wrong, of course, I was not calling for something without
While that call was not totally wrong, it most certainly was not
totally right either. I did not think that the S&P 500 would go
so low and I did not expect the rally to go up 60% (with maybe more
to come?). I would say that getting the direction right is more
important than getting the magnitude correct. If someone is worried
about a large decline and reduces their exposure, does it matter if
the decline is then 30% or 60%? Maybe some, but not as much as the
decision to reduce exposure.
Now for 2010. In trying to figure out what might happen, I think
some understanding of how markets tend to work is very useful.
While the details of this event have been different, the emotions
and behaviors expressed by market participants are not different.
With eight trading days left in 2009, the S&P 500 is up 22%,
which is very good. Unfortunately, since 1950 the market has only
been up 20% or more for a second year in a row five times. Those
five were 1955, 1996, 1997, 1998 and 1999 (actually only 19.5% in
1999). Many of the biggest up years, like 2009, are a snap-back
from the previous year.
Certainly those numbers do not preclude 2010 being a huge up
year, but they do show that buying power is rarely sustained into a
second year. Once some sort of historical context is built, some
kind of fundamental assessment is in order.
As John Mauldin has pointed out in his writings, the US economy
will need to create 250,000 jobs every month for several years in a
row to have a chance of getting the unemployment rate back down to
5%. Mauldin's thinking is that we need to replace the jobs lost
plus keep up with the growth in the population. With the current
path of debt issuance the US is holding, Ben Bernanke said that in
a few years all of the US budget will go to paying interest. The US
needs to issue more than $1 trillion in debt per year over the next
few years, with the hope that with interest rates at all time lows,
there will still be foreign buyers for this debt. Housing may or
may not be showing signs of stabilizing, there is another wave of
mortgage resets in the offing, and that is only a partial list of
the problems that have to be dealt with.
Historical data and current economic events can be spun to make
any case. I believe the easiest answer is that the US continues on
its path of being a less attractive investment destination than
other parts of the world. In the December 21 issue of Barron's,
they asked 12 market strategists for their predictions for the
S&P 500 for 2010. All 12 called for an up year, with estimates
ranging from 1120 to 1350 with the average being 1238. Going
against this grain is usually productive in trying to assess what
might happen. Beyond this poll it seems more people expect an up
year than a down year. The conclusion I draw from the fundamentals
is negative; combining that with what seems like positive sentiment
leads me to expect a slight decline for 2010. The reason to not
expect a large decline is that the S&P 500 is still 29% below
its closing high of 1565. I believe the market will be down about
10%; for a specific number I believe SPX 1000 to be it.
An important theme in 2010 will, in my opinion, continue to be
country selection. Foreign investing via some EAFE Index proxy will
likely not fare well as Japan and the Western European countries
that dominate that index may be just as unattractive as the US.
Over the last decade (numbers compiled by Bespoke Investment Group
as of Dec 1, 2009), the S&P 500 is down 24%, the UK down 23%,
Japan down 49% and Germany down 16%. At the same time, plenty of
other countries are up. Denmark and Hong Kong were up 30% in the
last decade, Canada up 39%, Australia up 51% and Israel up 109%
(these countries are at the lower end of the positive countries on
the table). I believe these numbers belie the fact that this theme
is more of a slow moving tanker as opposed to a speed boat (to
borrow someone else's metaphor).
Broad based foreign indexes provide exposure to both good and
bad countries. Success in the coming year, and more importantly the
coming decade, will require investing at the country level.
I have been writing about and investing in the same countries
for a while and I believe they can continue to do well. The
countries I own for clients are Australia, China, Chile, Norway,
Canada, Israel, Sweden, Switzerland, Brazil and one UK stock. I
would not hesitate to add exposure for new clients to any of those
countries right now. Other countries that could be of interest in
the near future include Denmark, Egypt, Peru, Singapore and
It is possible that the bearish view of the US will turn out to
be wrong but that does not change the fact that many foreign
countries are on firmer economic footing than the US, and so if US
equities do well again in 2010, many foreign markets (excluding
Japan and big countries in Western Europe) should do better.
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