The tumultuous first decade of the 21st century is nearly history.
Taking the mystery out of the first year of the second are predictions from our distinguished Research Roundtable panel of experts.
In October 2009, they largely look for more stability in both the economy and financial markets, though most view as iffy the sticking power of last year's rally.
Uncommon government intervention somewhat beclouds the crystal ball. Nevertheless, our panel — voicing widely divergent opinions on certain issues — draws a cautiously optimistic picture, citing such areas as energy and emerging markets as good bets.
Demystifying 2010 are Roundtable panelists:
John Buckingham (Laguna Beach, Calif.) Chief Investment Officer, Al Frank Asset Management, managing $460 million in assets. Editor, The Prudent Speculator newsletter. Manager, the $130 million Al Frank Fund, with an annualized 10-year return of 9.78 percent, through September 30, 2009.
Kenneth L. Fisher (Woodside, Calif.) Fisher Investments, which manages $35 billion in assets. Forbes Portfolio Strategy columnist for 25 years. Author of the New York Times best seller, How To Smell A Rat: The Five Signs of Financial Fraud (Wiley & Sons, 2009)
Nicole Gelinas (New York City) Searle Freedom Trust Fellow, Manhattan Institute for Policy Research. Chartered Financial Analyst. Author, After the Fall: Saving Capitalism — and Washington (Encounter Books, November 2009).
Robert L. Rodriguez (Lake Tahoe, Nevada, and Los Angeles, Calif.) CEO, First Pacific Advisors. President and CIO of FPA Capital Fund, with a 10-year annualized net return of 8.77 percent, as of August 31, 2009. His FPA New Income Fund, with a 10-year annualized net return of 5.56 percent, as of August 31, 2009, hasn't had a down year in more than 32 years.
What's the state of the stock market right now?
Fisher (left) : It's a bull market; the bear market is over. If this market were to turn around and reverse, it would be by far the biggest global so-called sucker's rally that's ever occurred.
Rodriguez: The stock market is overly ebullient and highly speculative. The robust earnings growth we've seen has came as a function of cost reductions, not top-line growth. We're in an interlude.
Buckingham: This has been a rally that's benefited crap over quality. Are we pricing in significant economic improvement — or lackluster earnings and perhaps another economic let-down? It's a little of both. Stocks aren't reflecting a robust economic environment.
Gelinas: We're doing the same thing that we did a few years ago: pushing asset prices up through borrowing. But this time, it's federal borrowing, not house borrowing. Everything has become a risk of the government and the financial industry.
What's your outlook for the stock market in 2010?
Rodriguez (left): A number of securities' prices that have had significant rallies are discounting some very optimistic outcomes. But what will top-line earnings growth be? There will certainly be more volatility. If we didn't feel this way, would we be selling?
Gelinas: The fact that we haven't fixed financial regulation will contribute to uncertainty and market valuations that are perhaps based on government guarantees and the expectation of future guarantees rather than on fundamentals.
Buckingham: Stocks can move higher because, despite the rebound, there isn't a lot expected of them. They've done so well this year that it's hard to envision that there won't be some pull-back. However, history shows that some of the best times to buy are after stocks have gone nowhere for 10 years — and in the last decade, stocks have gone nowhere.
Fisher: There will be some form of pull-back. But it will be a bull market, and we'll see markedly higher prices by the end of 2010.
How will earnings shape up?
Buckingham (left): As the economy continues to show signs of life, we'll start to see a little bit of top-line growth. But I'm not expecting it to become significant.
Fisher: Earnings will be very robust all around the world because people cut costs so much. Profits will be markedly stronger than revenue growth.
What's your outlook for the overall economy?
Fisher: The U.S. economy is clearly in recovery mode. It will grow. However, it will lag most of the rest of the world. Categorically, emerging markets are now leading the world; they have new stuff going for them. America has more things to get over.
Rodriguez: I don't believe we're in a sustainable economic recovery. We've seen almost unprecedented intrusion into the private sector. The Congress has been fiscally incompetent. They have leveraged up the system and not addressed the liabilities of Social Security and Medicare. Now you have the administration trying to do health care.
Gelinas: The real risk for the economy is that we've got a government whose economic policy is to keep housing prices inflated and allow financial firms not to take the full extent of their very real losses. This is crowding out other parts of the economy that may be more productive in terms of growth. Unless the financial industry shrinks, it's difficult to see how we'll have productive growth elsewhere.
Buckingham: I'm more optimistic about the first half of the year because expectations will be low. In the second half, the bars are going to start to rise; and we could run into some headwind.
What's the outlook for bonds?
Fisher: In a world where the economy is expanding, there's a bit of inflationary pressure. I don't expect to see very good returns from bonds.
Rodriguez: We're maintaining very short-duration, very high-quality bonds.
Buckingham: With all the money that's gone into bond funds, I'm pessimistic: The asset class that attracts all the money is often the one that performs poorly in the subsequent year.
What will happen with President Obama's financial reform plan in 2010?
Gelinas (left): [We need to] make financial firms accountable to market discipline like the rest of the private-sector economy and [institute additional] sets of regulations. If we had treated instruments, such as credit default swaps, like any other kind of financial instruments and put reasonable limits on them, we wouldn't have had a crisis.
