2009 Will Be Bad But Not Nearly As Bad As 2008


It’s not wishful thinking (or the emotional exhaustion talking), but 2009 is apt to be a calmer year that will reward stock-picking.

The notion may seem delusional following a market collapse that spared virtually no asset class (except Treasuries) and that meted out double-digit drubbings to every single stock-market sector. Economists are still bracing for a deeper economic slide and traders are waiting for companies to report very messy fourth-quarter earnings come February.

But peak volatility is rarely sustained over time. In a market where a deep recession has become rooted as consensus, where central banks are flailing very publicly in their fight to fend off disaster, bad news ultimately loses its ability to shock.

“Coming In 2009: Stockpickers’ Paradise” (subscription required) , Kopin Tan, Barron’s, The Trader, Saturday December 20

As 2008 winds down, most are expecting more of the same in 2009. But while I think 2009 will be a dreary and difficult year, I don’t think we’ll see the same level of emotion, volatility or decline. Stocks have dropped by about 40% so far in 2008. For stocks to drop another 40% in 2009, the S&P would have to trade into the 500s – highly implausible to me. The good news then, is that the worst has passed. 2009 will be bad but not nearly as bad as 2008.

One piece of evidence suggesting the worst has passed is the tremendous falloff in volatility over the last few weeks. After reaching as high as 80 in October and November, the VIX has sold off substantially in the last few weeks, approaching the 40 level of late.

My guess is that 2009 will be more sideways than down. I expect the lows of November (741 on the S&P) to be tested but I don’t expect substantially lower lows. Everybody knows that we’re in a recession, that it’s a very bad one and that corporate earnings will be terrible for the foreseeable future. It’s been front page news for months. Unless you live in a cave, you know the economy is terrible. That means a lot of this is already in stock prices and, as Kopin Tan wrote, bad news will lose the ability to shock.

When I write this kind of thing, I get a lot of e-mails from people telling me that I just don’t understand, it’s the Great Depression all over again, I’m going to get crushed, etc… It’s tiresome and tedious at this point. When everybody thinks that way, and we’re approaching that point, who is left to sell and push stocks lower? When this is how the crowd thinks, it is mostly priced into stocks already.

A couple of recent Wall Street Journal articles, including a front page one in today’s paper, drive home this reality. Today’s headline reads “Stock Investors Lose Faith, Pull Out Record Amounts” (subscription required – The Wall Street Journal, Monday December 22, A1). “I don’t have any confidence in buying any new stocks,” says David Herrenbruck, a 52 year old New York photographer. “Maybe now would be a good time to buy stock. But I am scared, to tell the truth,” says Peter Lush, a 61 year old Georgia retiree. “You put in all those years, and it is just falling right away from you. I was so fearful that I was going to lose everything,” says Karin Kuder, who had 60% in stocks at the beginning of the year, cut back to 50% in March and bailed out completely in October.

The same kind of sentiment was revealed in a Wall Street Journal article from about a month ago: “Fear And Frustration: Some Calling It Quits” (subscription required – The Wall Street Journal, November 24, C1). “I just don’t have the stomach for it anymore,” said Eugene Hibbs, a 66 year old semi-retired computer programmer in Santa Barbara, CA. Mr. Hibbs was entirely invested in stocks at the beginning of the year, shifted into commodities mid-year when stocks started selling off and then sold out of those when those started tanking as well. Now, he’s sitting in t-bills. Same story for 41 years old Fairfax, VA-based plastic surgeon Chris Hess, a buy and hold investor who sold all his stocks after seeing his portfolio sink 60%: “I’m never going to get my money back”.

“I saw markets continuing to implode, economists talking about a long, deep and harsh recession, experts bailing out. I added that all up and said, what am I doing there?” said 49 year old Rory Olson, CEO of Stock-Trak Group, a Montreal based company that runs a stock market simulation platform. Up until October, Mr. Olson had 90% of his holdings in stocks but sold them all within a 36 hour period. Long time investor Denise Zoros, a 53 year old mortgage broker, bought stocks in the Crash of 1987 and figured this time would be the same. She bought stocks as markets fell this year and was fully invested at the time of the article. “[Warren Buffett] says get greedy when others are nervous. But I don’t think I can do that anymore. I am getting ready to throw in the towel,” she said.

So when you send me an e-mail telling me that tons of retailers are going to go under, more banks are going to fail, unemployment is going to skyrocket, it’s all going to hell and it’s going to be Great Depression II, you’re boring me. That don’t impress me much. Really? How original! Who else is thinking along those lines? You’re the only one you genius with your incredible economic insight!

What matters is how things will be in 2009 in relation to the expectations that are now priced into stocks. That’s the key. You need a variant perception to make money in stocks, the great Michael Steinhardt discovered many years ago. Because a pretty dire outcome is already priced in, in my opinion, we are going to need a catastrophe to push stocks substantially lower. 700 is not “substantially” lower. 500 is.

I’m starting to work on my report for investing in 2009. The tentative title is “Too Late To Sell, Too Early To Buy: How To Invest in 2009”.

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