2009 started with stock market volatility reaching record highs, the S&P 500 heading towards its worst decline since 1932, and credit spreads soaring. Everyone was wondering if we were heading into the Great Depression II. What a difference a year makes. The Great Recession is over, the S&P 500 is up nearly 500 points from its March 2009 lows, and a collapse of our banking system has been averted.
With the New Year upon us, investors are left pondering where we are in the current market cycle. Will we see a correction? What sectors will lead the market? What are the long-term ramifications from all of the government intervention? How will the economy fair?
Based on the research of the investment team at Pinnacle Trust, we are looking for 2010 to unfold in three stages. Stage one will be a continuation of the 2009 rally, stage two will be a correction, and stage three will be a recovery.
Our best guess is that the market will continue to rally through the first quarter. This continuation stage should be highlighted by leadership in the technology, materials, and energy sectors. Continued strength in commodity prices is expected, and we believe small cap stocks with moderately outperform large cap stocks.
The second stage, or the correction, will begin in the second quarter and last through the third quarter. During this period we expect to see the defensive sectors such as utilities, health care, telecommunications, and consumer staples outperform. We will also likely see a correction in commodity prices during this period.
After the correction phase, we expect to see a resumption of the current cyclical bull market. We anticipate leadership again, from the technology, materials, and energy sectors. The recovery should last through the end of the year.
Regarding the economy, we are looking for GDP growth of 3.1%. We do not expect a strong consumer as there are many headwinds. Factors such as sluggish job creation, high unemployment, and lack of credit, will make it difficult growth in consumer spending to reach historical norms. The growth in the economy will in all likelihood, come from restocking inventories, a favorable interest rate environment, and government spending.
Globally, we still favor emerging markets and resource based economies. Emerging markets and resource based economies are currently in long-term or secular growth trends. That being said, we do expect a correction around the second or third quarter.
After the year is done, we expect 2010 to have been a positive year for investors and the economy alike. Despite a correction in the stock market in the middle of the year, the current recovery should last. Beyond 2010, we are concerned about the potential for inflation, rising interest rates, and the continuation of the secular bear market that we have been in since 2000. But that is a story for another day.
Jeremy Nelson, CTFA
VP & Investment Officer, Pinnacle Trust
jnelson@pinntrust.com
(601)707-9221
