This year has been nothing short of magical for the stock market - the S&P is up 25% year to date and and a whooping 67% since March 9th. The American economy is out of the worst slump it’s been in since the Great Depression, with many journalists calling the past two years the Great Recession. The best performing stocks of this year are all up above 100%, corporate bonds have rallied, oil has stabilized, and interest rates are hoovering near all times lows. With all this gain, especially in stocks, where do we head from here?
Valuations on the S&P 500 are high with an average P/E of 27 for the latest quarter. Corporate top line growth however is down 9% year over year for the third quarter of 2009. While we’re heading in to green pastures in 2010, this valuation has to come down to reflect the current growth situation.
The U.S. economy will no doubt do better in 2010 than it did this year. We will see the unemployment rate drop by summer of 2010, consumer spending will go back to acceptable levels, housing prices will stabilize, foreclosures will bottom out, consumer confidence should pick up drastically - things will look a lot better.
The stock market has priced all of this in however and if we get any hiccups in this, The Great Recovery, we should see the market sell off. In fact, a pull back is definite for 2010 as it’s time for the stock market to reflect realistic corporate gains.
Opportunities will be found in those industries lagging the general economy and we’ll be in a situation where macro-economic plays will be important, as commodities and currencies find their new price levels. The dollar should rally in 2010, gold prices should drop, and that inflation dragon will probably still be sleeping in his cave.
2009 will forever be characterized as the year the S&P came back from it’s scary lows with a force not seen in decades. 2010 should be the year the market normalizes.
I wish every trader the best in 2010.
Cheers,
Nik