Stockfessor

#66 Market Momentum 2010 — Stocks Forecast

Market Momentum 2010 – Stocks Forecast (#66)

As the year 2010 begins, let me try to identify the opportunities and risks for the stock market. It looks like this is going to be a good year with much more upside than downside. This article discusses the upside. The downside will be discussed in a later article.

You should never underestimate the ability of the stock market to adjust and rejuvenate. When economic conditions change, the market adjusts several months ahead of time. When a bubble has been created, the market will come down hard to destroy it. When stock prices plunge to a low level, big investors will move in to prepare for a rebound.

Low Starting Point
Many people fail to recognize that a strong bull is born when the market reaches a low bottom. The current deep recession has driven stock prices to real lows not seen for decades. This ensures that the bull will have a long time to run. The following figures show the opportunities that have already been realized in 2009:

————–March Low 09 ——–December High 09 ——-Per Cent Gain
Dow————6500———————– 10547——————-+62%
Nasdaq——– 1400————————-2291——————–+64%
S&P 500——– 930————————- 1128——————–+21%

The historic lows in March alone carry enough momentum for the bull market of 2009 and beyond, even though economic conditions still remain fragile.

Government Policies
Since the beginning of this recession, the government has tried to stimulate growth and intervene directly. In the US, the Federal Reserve has kept interest rates at below 0.25%, spent $800 billion to rescue some big financial companies, and another $800 billion to invest in infrastructure, green technology, and housing, etc. Many governments in other countries are doing the same to rescue the economy.

The huge government investments are flowing into the economy for several months now. Those companies benefiting from the government’s stimulus package will see their stocks rise.

Corporate Cost Reductions
When this recession began, most big corporations started cutting down production, employment and inventories to prepare for the worst. This results in a huge reduction of corporate expenses, thereby improving their bottom line and conserving cash. A decrease in corporate losses as realized in 2009 has stimulated the stock market, which saw it as a turnaround situation.

Merger and Acquisition (M&A)
M&A activities always buoy the market because of the hype. Companies with plenty of cash on hand want to acquire other companies struggling during the recession because they can be bought cheaply. You can see M&A on the rise since 2009 after the economy has hit bottom.

Consumer Rebound
Consumer confidence has been hurt badly due to millions of jobs being lost. It will come back depending on how soon the job market recovers. Consumer spending is considered a laggard in the economy because it always recovers last when the economy improves. The job loss in the US has been on a steady decline from 800,000 per month in January last year to 85,000 in December. Chances are we will see some job growth in 2010. When this happens, we will also see a rise in consumer spending that will stimulate corporate sales.

Corporate Sales Rise
Corporate sales cannot rise if consumer spending stays depressed. When the consumers come back to buy again, corporate sales will rise, which will lead to better earnings reports and higher stock prices. Consumer spending and corporate sales will be the last two pillars that sustain a stock market boom until a bubble reappears.

Market for Gold
The current recession has caused tons of investment money to flow into gold for safety reasons. This pushes up the value of gold to unprecedented levels. When economic conditions improve with the rise of stock prices as a result, some of the money will flow out of gold into the stock market.

Global Effects
We have to consider the rise of China and other Asian countries whose consumer demands will further feed the stock market boom.
The global effects can only grow stronger through each passing year.

Hypes, Bubbles, New Industries
Every stock market boom is stimulated by the hype about a particular industry, new or old. The last boom in mid 2000s was fueled by the housing bubble. Housing is not new but was hyped by sub-prime lending. The dot.com boom in late 1990s was fueled by the Internet, but the fad of Internet commerce was largely hyped at that time. The PC boom in mid 1990s was fueled by the real advance of electronic chips and the hype about multimedia products and the Internet.

What will the next ones look like in a couple of years? Let me cite some potential areas: hybrid and electric cars, rooftop solar, bio-fuels, biotechnology, and telecom bandwidth.

www.stockfessor.com
January 2010