Stock Market Investment Planning for the End of the Recession

By: Paul_J_Nolte

To mangle a bit of Shakespeare – we come to bury 2008, not to praise it. The real question is whether flipping the calendar will make a difference in the markets. Judging by the one trading day so far, yes it does. The economic numbers continue to look bad – from housing to manufacturing – and the earnings season that begins in a couple of weeks won't provide much better news. So with such a dire background, why are we teetering on the bullish side?

If we look at the recession in two parts, the first nine months of the year that looked bad, but bearable and the current portion that began in September. If the second “recession” lasts another year, we should be coming out sometime toward the end of 2009. We are already seeing signs of improvement in many of the credit markets – from junk bond spreads to the once closely watched LIBOR spreads. Volatility in the equity markets is also improving, indicating a willingness to accept risk. Our call for the year is a still poor first half to nine months and improvement into the end of the year. Economic growth for the full year is likely to be close to zero with unemployment rates hitting levels not seen in over 30 years. It won't be pretty, but better than ‘08.

While the markets demonstrated some strength into the end of the year, the major question is will it last? We believe that the markets can rally another 5-15% during the early part of the year before taking another meaningful correction/retracement back toward the old lows. Further, we do not believe that the bottom made in November is likely to be broken, so we are in the early stages of putting in a long-term bottom in the markets that should stand up to a retest later in the year.

Our long-term (multi-year) projects are for double digit-compounded returns that will surpass any the returns on cash/treasuries over the next 5-7 years. For all of 2009, we are projecting a modest return, maybe another loss (small) – officially a –5 to 5% range for the year, with much of the pain experienced in the first half. This is why we are suggesting to dollar-cost average back into the market using funds held in cash or short-term bonds.

Our bond model continues to suggest even lower rates ahead, a hard thing to do considering their currently very low rates. Since the lows in stocks during November, bond yields have inched up slightly, reducing the amount of gain for last year. What is more interesting than the barely there yields in Treasuries are the beginnings of a decline in the various spreads between Treasury yields and corporate, high yield and foreign yields.

Spreads widened dramatically during the crisis as investors flocked to the safety of Treasuries. That is beginning to unwind and presents tremendous opportunities for investors willing to take a bit of risk by investing in either/both corporate and high yield markets. We believe these markets have the potential to return double digits in the next year or two as the relationship between various bonds become more “normal” over the next 2-3 years.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2008 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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