What does 2010 hold in store for euphoric investors?
It's a well-known fact that economists have predicted 14 of the last 3 recessions.
It's another well-known fact that almost all gamblers lose money, because they can't accurately and consistently predict the outcomes of horse races and/or sporting events. It's with that preamble, and thinly veiled caveat, that I present to you my predictions for 2010.
But first, some context.
A Triple Whammy
We've recently been through one of the biggest financial dislocations ever. Last year, the global banking system came perilously close to collapse. Stock markets were hammered across the world, with the FTSE 100 falling as low as 3,460 in March 2009.
The ensuing recession has been one of the most savage on record. Unemployment now stands at 7.9%, a shockingly high number, but less than the US at 10% and 9.8% in the eurozone.
I've long been of the opinion economic recovery will be a long, slow process. Personal balance sheets are in desperate need of rebuilding. For those people in debt, they are being forced to reduce their borrowings. For those with savings, they've been hit by the triple whammy of falling home prices, falling share portfolios and near zero interest rates.
It all paints quite an ugly picture.
Best Since 1997
Despite that, the stock market has been on quite a run in 2009. Initially falling a scary 22% to its March lows, from that point, the FTSE 100 has since soared over 50%. Year to date, it is up 20% and headed for its best year since 1997.
Who would ever have thought such things possible at the beginning of this year, and certainly in March this year? Truth is stranger than fiction.
Given my assertion the economy is likely to continue to struggle, and from looking at the incredibly sharp 50% rise since March, the obvious conclusion is the stock market is riding for a fall.
But it rarely works like that, and in any case, just because the market has risen, it has no relevance on where it might go next.
Optimist vs Pessimist
There are any number of forces in action at any one time. Right now, we have interest rates at 0.5%. We have massive government stimulus spending, both in the UK and abroad, particularly the US and China. We have a truly enormous government deficit, and a looming general election.
An optimist may say, given the record low interest rates and the government spending, a speedy economic recovery will ensue. A pessimist may say it's all going to end in tears and we're in for a Japan-like lost couple of decades.
The truth is, no-one knows. We're all amateur economists these days, me included. I don't know why we do it, because virtually no "professional" economist predicted the last crash, and virtually no "professional" investor predicted the length and velocity of the great stock market recovery of 2009. What exactly makes us so qualified to make predictions now? And why should we bother, given we're likely to be very wrong anyway?
I do it because I enjoy it. It's a bit like individual shares. I could invest in a passive index tracking fund, or I could pick individual shares. The latter is much more fun, but also a lot more challenging.
6 Predictions For 2010
In the context of the above, I'll keep my predictions brief, because they are likely to be wrong. But I'll enjoy making them anyway...
Prediction #1: The FTSE 100 will close 2010 at 4,999.9, a modest fall of 5.7% from now.
Prediction #2: Gold will end 2010 below $1,000. I'm with Buffett, who says "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
Prediction #3: The UK base interest rate at 2010 year end will be 1.25%.
Prediction #4: I admit to being too pessimistic this time last year, when I said house prices have another 25% to 35% to fall. I'm still bearish, but because the economy is recovering and unemployment is stabilising, house prices probably won't surprise too much on the downside. The average UK house price at 2010 year end will be £154,999, down about 5%.
Prediction #5: No prizes for getting this one right -- David Cameron will be our new Prime minister in 2010. Gordon Brown to initially stay on as Labour Leader, before bidding a tearful farewell some time between now and the following election.
Prediction #6: Buying good companies at reasonable prices will continue to be a sound investing strategy.
Let us know your predictions in the comments boxes below. Whatever 2010 throws at you, remain realistic, happy and healthy.
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