While some economists fear a spike in inflation due to the massive influx of capital into the system, the analysts we spoke to aren’t particularly concerned inflation will be a factor in 2010.
“Jobs are still being lost, people are not getting jobs, demand is stagnant, households are continuing to deleverage, banks are not loaning, and all of that speaks to soft demand, and you don’t get inflation in that environment,” Dolan says.
Newsom says if the dollar goes down to 74, “it’s going to ignite the inflationary talk in 2010 and we’re going to see commodities such as crude oil, gold and some of the others make a strong run on the grounds that we’re headed into an inflationary period. I’m not convinced that we’re going to see that,” he says, adding that much of the market activity isn’t a reflection of inflation but rather of investment money coming back into commodities after being pulled out throughout much of 2008 and 2009.
Garner says that although current monetary and fiscal policy in the United States is supportive for inflation, it’s not an immediate threat. “It’s something that will eventually materialize but it will probably be 2011 or later because the stock market’s outpaced the recovery, and if that’s true, the lack of velocity and the money supply should keep inflation under wraps for the next year or so,” she says.
RECOVERY (OR NOT)
We may enter a recovery in 2010 if not before but it won’t feel like it.
“A lot of the corporate earnings have been driven by cost cutting rather than actual consumer spending. [Economic recovery] is going to be slow and steady in the right direction, but nothing gangbusters,” Garner says.
Cook agrees. “Instead of spending, [consumers are] saving a lot more, so that’s going to elongate the recovery process. I’m not looking for a full-blown recovery, but a slow trudge over the next year,” he says.
Springer expects any recovery to be temporary. “The leading economic indicators point to six months. The government is doing all the spending trying to wait out the downturn for the consumer and businesses,” he says.
Cook says traders should be prepared to get out if they start to see a big downturn. “Don’t let any position that you have run too far against you. If it takes exiting for a smaller loss, that’s better than being margined out or running out of equity. Equity preservation is more important than profitability over the next year,” he says.
Newsom advises looking into markets that are undervalued, like natural gas or live cattle, or are tied to economic growth, like lumber and copper.
Dolan says traders should not expect carryover from the equity rally in 2010. “We’ve had a 60% rally in the stock market since the lows in March, and we’ve had nary a correction, so anticipate a correction in 2010 and be prepared for more drawn out economic weakness,” he says.
Cook adds that balance will be key in 2010. “[Traders should] keep a good balance across their portfolios. You don’t want to be in too heavily correlated markets. For example, don’t be long both the Canadian dollar and oil, because if they crash, they’re going to come down hard. We never know when a shake-up [will happen] and we could have a lot more hiccups in this recovery than we think.”
Perhaps the key to all this is the term “trader.” Many analysts following the recent market turmoil have declared that the era of buy and hold is over. While some may be declaring a new equity bull market, most are keeping a closer eye on their portfolio and aren’t looking to get married to positions. That looks to be true and it is true of all markets, not just equities. As many a wise trader has said: bulls make money, bears make money and pigs get slaughtered.