I don’t know if investors are looking forward to the new year or if they are just fed up with the past year. Whatever the consensus, looking back …
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I don’t know if investors are looking forward to the new year or
if they are just fed up with the past year. Whatever the consensus,
looking back only seems to fuel more bad news, making it difficult
to see any hope. However, time will tell, as it always does, how we
evolve to better times.
Our investment committee, headed up by Cameron Cooke, is making
assessments for where potential opportunities lie for investors in
the coming year. While not everything is coming up roses instantly,
we believe 2009 will be a year of transition, a sort of healing
after disaster. It is often in transition where new ideas emerge,
or perhaps we have more interested listeners than usual, and some
ideas will start to take hold in this unique environment.
Cooke’s following assessments of the bond, equity, and
commodities markets are cautiously optimistic, seasoned with a dose
of reality and a lot of patience. Investors should note that all
investments carry risk, and commodities and foreign can fluctuate
more than others.
Regarding bonds, the flight to quality has been dramatic in
2008, and treasuries will likely continue to perform relatively
well until the market begins to anticipate the economic turnaround.
At that point, the Fed may intervene and buy treasury securities to
prevent interest rates from spiking higher. In this regard,
treasuries could outperform expectations.
The equities market is discounting the economic fallout from the
mortgage crisis and the unwinding of large amounts of credit
accumulated during the last cycle. Employment will be a leading
indicator during the downturn in terms of the deepening recession,
but it will be a lagging indicator after the economy turns and
companies build margins again.
The stimulus package being put together by the Bush and Obama
administrations will have some economic impact. However, it may be
a myth that New Dealing pulled us out of the Depression. In fact,
World War II and the subsequent rebuilding of Europe and Japan were
the fiscal stimuli needed to pull the world out of the Depression.
In this respect, we may be lucky, in that we do not need a war
stimulus. The BRIC — Brazil, Russia, India and China — countries
are in the process of modernizing, and this could be the stimulus
for growth during the next business cycle.
2009 is likely to be a year in which we find the bottom in the
stock market and begin to rebuild the economy. Growth rates are
likely to be subdued without the free availability of credit, at
least to the previous extent. As a result, valuations are likely to
reflect this lower growth environment.
We believe it will be key to be selective in the stock market,
and valuation will be the overriding driver for investment
performance. Given this environment, traditional value sectors will
likely outperform after an initial bounce by oversold commodity,
financial and growth stocks.
Given the above factors, international market recovery is likely
to lag in the United States, but could swiftly catch up because of
tight supply chains and low inventories. Although much has been
written about the diminishing importance of the United States, it
is the largest and most diverse economy by far and will likely lead
economic activity for the next cycle.
The demand for commodities over the last several years has been
driven by the economies of the BRIC countries and has been
exaggerated by leveraged bets by hedge funds. The slowdown in the
United States spilled over into these countries, and now they are
trying to use their considerable foreign exchange reserves to
stimulate their own economies.
These stimulus plans will have some effect in 2009; however,
these emerging economies are not yet robust enough to be
self-sustaining. We think commodities are likely to bounce once the
bottom is reached, but capacity overhead and slow demand will limit
intermediate-term upside in this area.
Lack of confidence has often been blamed for the market declines
in 2008, but this oversimplification does not fully take into
account the significant losses suffered in the credit markets due
to excessive leverage in the mortgage market and at investment
banks. As losses spiked in mortgage backed securities due to
defaults caused by rising interest rates, the “equity” in the
leveraged structure of these securities was quickly wiped out. The
lack of confidence is a symptom, not a cause, for what is going on
in the credit markets.
Therefore, as the economy begins to heal, consumer confidence
often follows. Investors should be diligent in their actions as
2009 could be a very important turning point in the financial and
Patricia Kummer has been an independent certified financial
planner for 22 years and is president of Kummer Financial
Strategies Inc. at 8871 Ridgeline Blvd. in Highlands Ranch. She is
a financial consultant offering securities through AIG Financial
Advisors Inc. and investment advisory services through KFS Inc. She
welcomes your questions at www.kummerfinancial.com. The
views expressed are not the opinion of AIG Financial Advisors, Inc,
and should not be construed as an offer to buy or sell any
securities. Investing is subject to risks including loss of
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