Despite what is being called the worst recession since the Great Depression, things could be much worse. I’ve lost a job in my life so I know what it is like. It is not fun, but hey I pulled myself up by the bootstraps and here I am.
With the new year almost upon us, investors are left to wonder where to invest in 2009, if at all.
Bears vs. Bulls
While it is still uncertain where we go from here, there is a very interesting tug of war going on in the market between the bulls and bears.
The bulls are betting that the worst of the losses are behind us. With billions of dollars in stimulus combined with low interest rates, the recession is expected to end at some point in 2009.
The bears say there is more pain to come. The economy is weak and getting weaker. Stimulus only delays taking the medicine and will do little to fix the underlying problems. In the best case the recession ends at some point in 2010.
I’m a bit concerned of current bullish sentiment. There are far too many professionals and talking heads suggesting that a bottom was reached in late November. According to this view we can expect stocks to rally in 2009.
Using History as a Guide?
More worrisome are the views that suggest that we are due for a very sharp rally. I heard one supposed expert state that the market could rally by 20% or more in 2009 using history as his guide.
Never mind that this expert has underperformed the market over the last few years. Even if you grant him a pardon and buy into the historical argument that the market is simply due for a sharp snap back rally I would contend that we are in uncharted territory.
The problem is that history will be no guide in our current situation. With investors facing confidence and trust issues with respect to companies and how they are run, premium valuations will be hard to come by.
There is an awakening of sorts that is both good and bad. Investors are no longer blindly buying stocks because history says that is the thing to do. That herd mentality resulted in price to earnings valuations on most stocks to increase greatly over the last 30 years.
Today, investors are rightly wondering whether or not it makes sense to pay a premium valuation for stocks when earnings or profits can disappear in a blink of an eye. It is a good question to ask.
Many claim that double digit p/e ratios are deserved in a low interest rate environment, but if that low interest rate environment is due to deflation does the same axiom apply?
It does not. The conclusion then is that stocks could very well struggle well into 2009 as the market sorts out these issues. Then again, sitting on the sidelines may result in missing that huge rally that many predict.
The bond market is basically goading investors to put their dollars into riskier investments like stocks. Will they take the bait?
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com. James F. Dlugosch contributed to this article.
