TORONTO (GlobeinvestorGOLD) -- In all the years I have been writing about personal finance, there has never been one that is more difficult to predict than 2009. The "expert" forecasts I've been reading in the media and in analysts' reports are all over the lot. The deepest pessimists are calling for a rerun of the Great Depression, with the economy taking a decade or more to recover from the brutal beating it is experiencing. The optimists are predicting that stock markets will turn around by mid-year and the second half of 2009 will see an explosive recovery. One forecast I saw has the S&P/TSX composite index rising 30 per cent this year. Wouldn't that be nice?
My feeling is that there is too much uncertainty and too many variables in play to offer any truly meaningful forecasts. However, I am prepared to make some educated guesses about how the year will unfold. Just remember that's all they – guesses. Don't bet the house on any of them.
The S&P/TSX composite and the S&P 500 will be higher at year-end than on Jan. 1. This is going to be a very difficult year for economies around the world and we clearly will not escape. During the first half of 2009 we should expect one bad news story after another: rising unemployment, more corporate and personal bankruptcies, falling house prices, dismal earnings reports, huge budget deficits, and more. It will not be a pleasant time. Survival will be the name of the game.
The impact of all this on the stock markets will be continued volatility and possibly another major correction before spring. But after that, I look for the major indexes to begin a recovery even though the economy will remain soft. The reason for this cautious optimism is that stock markets are historically leading indicators. They will reflect anticipated improvements in the economy months in advance. So if we start to see indicators of an economic recovery in 2010, the markets should be moving ahead by the second half of this year.
The precise timing is impossible to predict as is the extent of any advance. All I'm prepared to predict at this stage is that at the close of trading on Dec. 31, 2009, the S&P/TSX composite will be above 9,000 and the S&P 500 will be higher than 905.
Corporate bonds will outperform government bonds. There was no better place for your money in 2008 than government bonds. And U.S. Treasury bonds were the best of all because Canadian investors enjoyed a significant gain on currency exchange on top of any capital gains and interest on the bonds themselves.
It won't be the same story in 2009. While safety will still be high on most people's priority lists, the absurdly low yields on federal government securities will encourage investors to seek out alternatives. The beneficiaries should be highly-rated corporate bonds and, to a lesser extent, provincial bonds.
Bond availabilities and pricing will vary from one broker to another depending on what they are holding in inventory and the mark-up charged. And buying individual bonds can be extremely tricky and should only be undertaken with expert advice. For example, some highly-rated Toronto-Dominion Bank bonds I looked at have what appears to be a very attractive yield to maturity but they contain a provision that adjusts the coupon rate several years before maturity to that paid by bankers' acceptances plus 1 per cent. So if bankers' acceptances are yielding 1.5 per cent, you'll receive only 2.5 per cent and the yield to maturity will suddenly look much less attractive. Unless you're a skilled bond trader, use a low-cost mutual fund or an ETF.
Interest rates will edge higher towards year-end. Unless we really are heading for Great Depression II, this one is a no-brainer. With governments around the world printing money as fast as the presses can operate in an attempt to reflate their economies, it's only a matter of time before rates stabilize and then begin to move higher. It won't happen soon, however. No central bank wants to make the mistake of increasing rates before there are clear signs of an economic recovery. But by year-end, I expect that target rates in both Canada and the U.S. will be higher than current levels. Since they are effectively at zero in the States, there's really nowhere to go but up.
The loonie will rise slightly. The Canadian dollar's 20 per cent+ decline last fall caught everyone off guard. The loonie had been expected to lose steam with the decline in commodity prices but under normal circumstances a pull-back to the range of 85 cents (U.S.) to 90 cents would have been more in line with reality. The situation was exacerbated by the flood of offshore money into U.S. Treasuries, which pushed the value of the greenback higher. That made little sense at a time of rapidly falling U.S. interest rates, mind-boggling deficits, and multibillion dollar bailouts but rationality was in short supply in the fall of 2008. We should see some stability return to currency markets in 2009 with the loonie trading in the 85 cents range by year-end.
Oil prices will rebound. Oil has always been a highly cyclical commodity. It never moves in a straight line; just when you think a clear trend is in place, everything turns upside down. It happened again in 2008. In July, the world price of crude hit $147 (U.S.) a barrel and everyone knew it was only a matter of time before it reached $200. Actually, it probably is just a matter of time – it's just going to take a lot longer than anyone expected a few months ago.
Now oil is trading around $45 and some analysts are predicting it could fall to $30 or even below. Sure it could. As recently as 1998, the average price of a barrel of crude oil was $11.91. But it didn't last long then and it won't this time either. But neither should we expect a return to $100 a barrel in 2009 or even in 2010.
It’s instructive to look at trends in oil prices since the end of the Second World War. For a generation, from 1946 to 1973, the average price of a barrel of domestic U.S. crude remained in a narrow trading range of about $3 on each side of $20, inflation-adjusted, according to figures published on InflationData.com. Then came the oil shock of the 1970s. Crude broke out of its long-term pattern and within two years the price per barrel more than doubled. By 1980, it had hit an inflation-adjusted average of $95.50 a barrel. Gasoline prices soared and people became convinced that oil prices would keep rising forever.By 1986 – only six years later – the price of a barrel of crude had plunged more than 70 per cent! Except for a brief spike in 1990, it remained fairly flat until 1998 when, as I mentioned earlier, the bottom fell out.After rebounding in 1999-2000, oil prices again went into a flat stage that lasted until 2003. Since then, it moved higher at an accelerating rate until the summer of this year. The last time we had a run like that was from 1973 to 1980.The point of all this is to remind readers that although cycles can run for several years, nothing lasts forever. At current levels, the price of a barrel of oil is down almost 70 per cent from its July high. That is the largest six-month drop in history; nothing else even comes close. We know that the energy companies aren't going to give away the stuff; in fact they are already starting to reduce production. So at some point in 2009, supply and demand are going to come into balance. Since producers can't turn the taps on again at a moment's notice, inventories will begin to fall putting upward pressure on prices.
Yes, I know there is a recession on. But the last time I looked there were still traffic jams at rush hour, planes were still flying, electricity continued to be generated from oil-fired plants, and plastics were still being manufactured. The world still has not found a substitute for the gunky stuff. The price will turn around and with it the fortunes of energy stocks.
Those are my calls for 2009. Next year we'll look back and see how they turned out.
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