Ten forecasts for 2010

It’s that time of year when analysts and strategists put pen to paper (and necks on the line) to provide investors with their forecasts for the coming year. While 2008 ended with a large measure of doom and gloom, the outlook for 2010 is mostly upbeat. Here is the consensus view (with some outliers thrown in for good measure).
1. Stocks will go higher. Pretty well everyone says so. The average target for the S&P 500 is 1226 (versus its closing level of 1125 on December 29). For the S&P/TSX, most strategists are centred around 12,500 – modestly higher versus last night’s close of 11,700. At the beginning of 2009, the consensus was generally correct in direction and magnitude with their targets for the end of 2009. Unfortunately, forecasters waffled when the world was falling apart in March. At that time, they lowered targets to avoid looking absurdly optimistic. As the year progressed, targets rose and most analysts got it right by year’s end. We’ll see how well they do in 2010.
2. Gold will go higher. The consensus is for gold to average $1100 US per ounce in 2010 but John Licata at Blue Phoenix (who was bang on with his late 2008 call that gold would reach $1200 per ounce in 2009) is much more optimistic at $1375 per ounce for 2010. But there are a few forecasts for gold to fall. Doug Kass at Seabreeze Partners includes a topple in the price of gold in his forecasts for 2010. But this topple is for a relatively modest decline to the $900 per ounce level (versus today’s price of around $1100 per ounce).
3. Interest rates will rise but when? Mark Carney, the governor of the Bank of Canada, has given us his conditional commitment to hold rates steady until the middle of 2010; so something sooner would be a surprise. And it’s rare to find a strategist who doesn’t see the punch bowl being removed by the U.S. Federal Reserve in 2010. Goldman Sachs economists stand out here stating recently the Fed will remain on hold until 2012.
4. Bond prices will fall. The very steep yield curves in Canada and the U.S. already build in a tighter central bank environment in 2010. But many investors remain concerned about even more upward pressure on long term bond yields given the massive deficit position of the U.S. government, the need to fund that debt and the view that the big foreigner buyers (read China) could eventually not show up at one of the massive weekly auctions. Most portfolio managers say government bonds will not be an outperforming asset class in 2010, although corporate bonds are expected to continue to do well, say most portfolio managers as profits and the economy improve and default risk declines. The smart investors will watch global credit default rates to ensure the decline in risk continues downward as it has through 2009, and stay on the lookout for any reversals that might portend a change in risk sentiment.
5. Economies will grow in 2010. The recession is over. Not much dissent here. Again, there are a few lone voices that call for a pull back in economic growth next year – but the consensus is for U.S. and Canadian economic activity to expand 2 to 2.5 percent (with some forecasts into the 3 percent area for one or more quarters). A negative quarterly number in 2010 would be a surprise for most investors as would any negative turn in U.S. jobless claims, which should track lower as the economy grows. Stronger than expected growth is not the consensus view, so quarterly growth in U.S. or Canadian GDP above 3.5 percent would be an eye-opener for most prognosticators.
6. The dollars – both the Canadian and U.S. – will rise. The loonie has been averaging about 95 cents US for the last quarter of 2009 but most anticipate something closer to parity in 2010. The big call for 2010 will be on the U.S. dollar. Its modest 4-percent rebound in the last few weeks compares with a 17-percent decline from the 2009 highs. The fundamentals for the U.S. dollar are not compelling for bulls (deficits no matter where you look as well as a call for a new reserve currency gaining volume). But sometimes the least obvious trade is the right one and the higher U.S. dollar forecast is finding a few more voices (including influential newsletter publisher Dennis Gartman).
7. Commodities rule! While this view is becoming a little less dominant, the consensus remains mostly in favour of a cyclical bias to portfolios. With Chinese growth forecasted to accelerate in 2010, their demand for “stuff” is likely to remain firm — or at least that’s the common view. And as commodities remain “bid,” earnings growth expectations for energy and materials companies are strong (88 percent and 72 percent, respectively for the S&P sectors representing those two groups). Oil may be a wild card. Right now the consensus estimate is that oil will average $75 US per barrel in 2010 – just about where it is now. But with tensions rising in the Middle East (a recent attempted terrorist action over the holidays and Iran gaining front page headlines again), this may turn out to be an area where the consensus could change dramatically.
8. Bubbles, bubbles everywhere bubbles – but who has a pin? History is replete with investment bubbles and busts – but very rarely, if ever, has a bubble been seen by the consensus in advance. This time around there’s a bubble being detected around every investment corner. Detecting where the bubbles are (Canadian housing?) and how they get deflated will be one of the key stories for 2010.
9. Banks fail – many of them. In 2009, the FDIC has administered the failure of 140 U.S. banks, and in its latest report, advises that there are 552 institutions on the “problem” watch list. The prospect of more failures in the next few years is likely. But will there be a “big” failure? Not likely. But even a hint of this possibility could upset the easing risk trade in financials. Recent underperformance by some of the big names in finance (Goldman Sachs, for example) and the technical weakness in the Financial SPDR may be a harbinger of a less robust performance in 2010.
10. All of the above could be wrong! The old saying “Hope for the best but prepare for the worst” may be a useful investment recommendation for 2010. The consensus is relatively sanguine about the economic and market outlooks for next year. Yes, the punch bowl will be removed, but that will be because global economies are ready to grow on their own. Corporations will see rising profits and with valuations relatively modest, upside potential for stocks and corporate bonds are attractive. The risk trade is still on and risk indicators continue to decline (the VIX is below 20). China will grow. Political issues remain manageable. The prospect of sovereign default is modest. Ahhhh, the best of all possible worlds – unless it isn’t. Be careful out there.