My Stock Market and Real Estate Predictions For Year 2009
Published 1/1/09 (Modified 3/8/11)
Goodbye 2008 and Good Riddance - Hello Year 2009!
Happy New Year everyone! As much as I'd like to be forward looking, sometimes it's hard not to recap the past. I think 2008 will go down as one of the worst years in American history in terms of the economy and national morale. Since the start of last year, there has been this gloomy gray cloud of recession worries and depression fears that has persistently lingered over the heads of all Americans. Despite our attempts to shake its clutches by turning our attentions to more exciting events such as the media circus and hype surrounding the historic presidential election of���� Barack Obama, the first African American to be voted into the White House, it appears the ominous clouds will follow us into 2009 and beyond for the foreseeable future.
Who To Blame and Where To Go From Here
Those who want to take the easy way out by blaming the credit crisis and current economic woes on the Bush administration, or on the Democratic Congress, or even on the ongoing wars in Iraq and Afghanistan - have their sights on the wrong culprits. The primary blame should be placed on ourselves - the credit and home hungry American consumer who pushed housing prices to astronomical and unsustainable levels. Weaned on easy credit and driven to consume to great excess over the last few years, our abandonment of the age-old practice of saving and living within our means put us on the road to financial disaster that finally came to fruition during 2008.
While the spigot of credit offers and home mortgage loans flowed freely and easily, the destructive cycle of revolving debt and high risk investing was triggered. When housing prices finally halted its irrational surge and began to plummet, so too did the fates of dependent investment banks and mortgage lenders. The precipitous downfall took with it - former pillars of American financial might - companies like Bear Stearns, AIG, and Fannie Mae. In 2008 we saw the fall of major savings banks like IndyMac and Washington Mutual, and witnessed the catastrophic destruction of shareholder equity in financial giants like Citibank, Bank of America, and JP Morgan Chase. The domino effect of the housing collapse has caused the entire U.S. economy to pull back, leading to a decrease in consumer spending activity, triggering further scale backs in worldwide economic growth. With the ongoing deterioration and lock up of the credit and banking institutions, we are now entering an unstoppable economic recession, as massive in scale as our nation's ever experienced, with no end in sight.
Certainly the federal government with its regulatory oversight powers have some share of the blame as it was their responsibility to ensure home mortgages were being priced fairly and sold at levels warranted by the underlying risk. The federal government's overzealous housing agenda and eagerness to ensure that all Americans became homeowners (when a vast segment had no business ever becoming one), resulted in billions to trillions of dollars worth of risky subprime mortgages being offered to individuals totally unqualified for such loans. The Fed (with its infinite number of financial experts) still managed to fall asleep at the wheel and wind up negligently steering the great American ship into an economic iceberg. If it's one thing that we hopefully have learned from 2008, it's that even the most savvy and professional of financial experts fail to get it right sometimes - just ask any one of the trusting and savvy investors who invested their life savings with hell-bound scam artist Bernie Madoff and his $50 billion Ponzi scheme.
Without a doubt, 2008 was a terrible year for the economy. Many of my friends, particularly those in the financial and accounting sectors, now find themselves laid off and unemployed for the first time in their lives during what will likely go down in history as the worst economic recession since the Great Depression of 1929. But amidst the financial anger and desperation, I have faith that better times are ahead of us. Unless financial Armageddon is truly looming (and I don't think it is), there is hope for better days in the years ahead. Until blue skies reign again, we'll simply have to buckle down and adopt a more defensive financial and savings strategy to weather this economic storm. After all, we are all in this together - each feeling the economic pain in some way or another. We'll get through the tough times in due time.
One Thing I Learned in 2008 - It's Impossible To Predict The Direction Of The Economy and World Events With Any Real Precision
At the beginning of 2008, I posted a blog entry about my stock market projections and financial predictions for 2008. The purpose was to compare my plans for the new year with actual reality 12 months after. Well, after examining my predictions for 2008 and comparing my projections with what actually happened, I've come to the conclusion that I'm the worst soothsayer in the world. The great majority of my predictions were way off base, but then again, who could have predicted the current events as they ultimately turned out? It just goes to show that despite our best efforts, financial predictions are simply educated guesses at best. Here is how my predictions fared against economic and political reality.
- In January 2008, I predicted the U.S. economy would be able to stave off a full blown recession during 2008, not realizing just how bad the financial and housing markets were and how much wealth destruction they would ultimately wreck on the overall economy. I was completely way off on this particular prediction. The economy ultimately nose dived into a severe recession and currently we are teetering on the brink of another cataclysmic wave of unemployment increases, surge in credit induced bankruptcies, and further drops in consumer spending. The collapse of the American economic engine due to unsustainable subprime mortgages and plummeting home prices has also managed to bring down down the economies of the rest of the world, as evidenced by staggering stock price wipe outs across the board in most of the U.S. and world stock markets. During the 12 month span of 2008, the Dow Jones Index plummeted 34%, the S&P 500 Index went down 35%, and the NASDAQ dropped 40%. Asian stock markets fared even worse as the Korean KOSPI dropped 41%, Japan's Nikkei dropped 42%, and China's FTSE/Xinhua FXI 25 Index plummeted a staggering 50%.
- Interestingly, I predicted Presidential candidate Hillary Clinton would ultimately win the Democratic nomination and go on to win the U.S. Presidential election as I did not believe the Republicans could produce a sufficiently viable candidate who could sufficiently distance him or herself from President Bush and his administration to compete with the Democrats. A Democratic candidate ultimately did win the national election, but instead of Clinton, it was young Barack Obama who captured the hearts and minds of the American people, inspiring them to vote in the name of change for the nation's first non-Caucasian president.
- I'm not sure what to make of my prediction about the direction of oil prices. For 2008, I predicted that crude oil prices would not exceed $100 a barrel and that average fuel pump prices would remain steady at around $3.00. However, after blowing past the $100 mark and reaching highs of $125 during spring 2008, crude oil prices ultimately plummeted in a span of only 9 months due to drastic pullbacks in world wide fuel demand triggered by slowing world economies, eventually causing crude oil prices to plunge below $50 a barrel. Fuel prices now stand at less than $1.50 a gallon at many gas stations across the United States -���� absolutely stunning levels we haven't seen in some time. I suppose that's one thing we can be thankful for these days - the availability of cheap gas.
In Terms Of the Stock Market, Gas Prices, the Housing Market, and the Economy, Here Are My Financial Predictions For���� 2009:
1) Doomed U.S. Auto Industry - Despite the vehement protests from a vast majority of American taxpayers, the U.S. President and Congress ultimately chose to ignore the public will and bail out the beleaguered U.S. automobile industry with a series of quick loans and a plan to buy shares in the companies. Unfortunately, I don't believe the American auto industry as it currently exists today can be saved. Ultimately, I believe the big three car makers of GM, Chrysler, and Ford will need further governmental intervention at the risk of taxpayer expense sometime during 2009 to stay afloat, and will be back for more urgent federal bailout money. As it currently stands, the collective business model of the entire American auto industry is extremely flawed and the biggest crippling factor of the car makers' ability to become profitable is the United Auto Workers (UAW) union. Unless the U.S. automakers can be freed from the high cost of its union strong-armed pension packages, health plans, and high wages, the U.S. auto makers will never be able to compete with their more financially efficient foreigner competitors like Toyota or Honda.
2) Low Gas Prices - I predict fuel prices will stay low for the entire extent of 2009 due to diminishing fuel demand and persistent economic drag attributed to the current economic recession. The only event that may trigger a significant increase in fuel prices sufficient to counter the recession effects would be some type of significant geo-political event such as an act of significant terrorism similar to that which occurred on 9-11 (which I don't believe will come to fruition).
3) Continued Bad Economy and Recession - I believe the U.S. economy will get worse before it gets better. The first two economic quarters of 2009 will be absolutely horrendous as unemployment rates will surge and businesses will continue to lay off employees and shut down due to deteriorating conditions. In the latter half of 2009, during 3Q and 4Q, the U.S. economy will continue to suffer, although to a lesser degree than the first half. However, I don't expect any type of notable economic recovery during 2009. Even if Obama pushes through his rumored $1 trillion economic stimulus plan complete with another round of tax rebate checks, the economy will still need a significant amount of time to work itself out. The banking industry and credit markets have simply suffered too much damage, and a new way of doing business must emerge before the economy will improve. Get ready for tough times ahead - grumpy bears are here to stay, and beat up bulls have left the building. I'm not predicting an outright economic depression, but it'll be close to one.
4) Worsening Real Estate Market - Housing prices will continue to plummet in 2009 with no stability in sight. Certainly housing prices are ultimately local and regionally based, but nationally, I project average home prices to drop about 15% in 2009 and another 5% in 2010.���� The current national glut of homes for sale is simply tremendous and the available housing inventory exceeds a 12 month supply. Furthermore, the rate of home foreclosures continue to increase and the ongoing credit crisis continues to make home mortgage refinancing difficult for most home owners. While mortgage interest rates for prime borrowers have dropped to lows of nearly 4%, the vast majority of prospective home buyers seem content to wait it out, knowing that time is on their side in terms of finding their dream bargain home in the next few years. I would know - I'm one of them. As a prospective single family home buyer myself, I'm in no hurry to buy a home anytime soon. I'm currently waiting for home prices in my area to drop another 20-25% before I step in. Knowing that many home sellers are refusing to sell their homes at present day low prices and are hoping to wait out the housing recession as well, it's my belief that their collective refusal to sell at today's low levels are only contributing to the worsening condition of the real estate market. Eventually, sellers will have to face the grim reality that home prices will not be returning to the highly leveraged levels of 2006 or 2007 for decades to come.
5) Gloomy Stock Market - Financial pundits frequently cite the truisms that the stock market is a forward looking beast and that it usually responds about 6 months before the actual economy does. Those two traits certainly may be true, but I don't think the U.S. or world stock markets will be pricing in any type of economic recovery during 2009. The earliest we will likely see a bounce back will be sometime during 2010, at that's being optimistic in my opinion. The high stock market prices of years past will not return again for many years. Remember, stock prices from 2002-2007 were buttressed through the power of leverage and debt financing via the unsustainable mechanisms of fancy mortgage backed securities and free flowing loans. With the current housing market destroyed, financial markets ruined, and banking institutions clutching their federal bailout money for life support and afraid to lend it out, it will be some time before we can expect stock prices to recover. Because investment and consumer sentiments are so pessimistic, and leveraged plays have all but disappeared, a quick V-shaped recovery is almost unthinkable. Perhaps it's time to buy gold or save money in high yield savings accounts with the best banks online. For the majority of 2009, I plan to adopt a defensive turtle strategy and seek out protective investments such as FDIC insured savings accounts or high yield CD's.
6) End Of Lucrative Credit Card Offers - With the recent passage of the new credit card rules by the federal government that greatly favor credit card consumers, scheduled for effect on July 1, 2010, major credit card issuers like Citibank, Capital One, Bank of America, Discover Card, and American Express will be forced to restructure their existing credit card agreements to respond to the new regulatory demands. During 2009, the major credit card issuers are likely to increase credit card interest rates for all consumers across the board, for both good and bad credit card customers alike. To compensate for the less favorable profitability standards of the new credit card regulations, formerly lucrative 0% balance transfer offers will be gradually be fazed out, with FICO credit score standards increased substantially to weed out those applicants with questionable credit ratings. While the new credit card rules don't officially take effect until the summer of 2010, the credit card companies are likely to start implementing significant changes over the span of 2009. The era of the App-O-Rama and 0% APR balance transfer credit card deals is coming to an end.