2009 is about to become a memory, and as Carl Noble recently wrote, what a remarkable year it was! Over the next week the investment team will be wrestling with many issues that will impact our future outlook and asset allocation; such as will inflation or deflation be a bigger force over the next six months? Can consumer spending make a comeback in spite of stiff headwinds? When will the monetary and fiscal authorities begin to remove excess liquidity? Today I thought it would be fun to put together a list of things that could potentially turn in a positive direction and keep the bulls running in 2010:
- Confidence could build on a foundation of continued healing in credit markets, rising asset prices and net worth, and the general feeling that monetary and fiscal authorities have successfully avoided Armageddon.
- The steep yield curve and rise in financial assets prices could continue to aid banks and the financial system by building in a profit backstop and helping to keep capital ratios healthy.
- Employers, after slashing payrolls to the bone, could go one step beyond firing less and begin to hire back employees.
- Higher employment could fuel wage growth and bolster spending. This could stick a stake in the heart of the “new normal” theory, and potentially unleash a wave of new buying from previously defensive investors who may be at risk of underperforming a benchmark, or are simply tired of hearing about how much more money their friends made at the latest cocktail party.
- Capital spending could increase markedly based upon improving profits, rebounding corporate confidence, and low capital costs. Earnings could continue to improve based on top line revenue growth as opposed to relentless cost cutting.
- The demand for credit could increase, banks could start lending more, and the velocity of money could begin to expand and give fresh legs to the upturn currently in progress.
- The slack created by the deep recession could keep inflation at bay for some time and give central banks plenty of room to avoid withdrawing stimulus too quickly.
- Economic data could continue to steadily improve, to the surprise of those who are counting on a double dip recession or a post-stimulus economic relapse.
- The aggregate of all of these inputs could simply create more confidence, more spending, and more earnings, and yes, a positive feedback loop could emerge…
Investors must always retain a healthy appreciation regarding downside risks to their forecast and allocations, particularly given the asymmetric law of numbers that exists. But risks are not a one way street, and being too early to withdraw volatility can be just as wrong as being too late to get defensive. Those who manage money can’t just focus on the negative scenarios, which is one reason we will be thinking about what could go right in 2010.
