2010 — a Year of Consolidation?

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

The stock and commodities markets need a correction. They’ve experienced some pullback in recent weeks, but I think these markets need something more substantial. In my view, it would be a healthy development for stocks, gold and silver.

Speaking of gold, if the spot price keeps ticking lower, I would seriously consider this an opportune entry point for those without an existing position. We’re not there quite yet. The same thing applies to stocks only if there’s a meaningful correction. When it comes to gold, I’d stick with a large-cap, unhedged producer. I’d also consider taking on new positions in domestic large-cap companies that have a solid track record of increasing dividend payments to shareholders.

For the speculative end of an equity portfolio, it’s hard to go wrong with Chinese equities. Of course, a lot of these stocks have already appreciated substantially. Attractive new opportunities in this sector are scarce at this time.

From my perspective, there are less and less attractive stock market opportunities right now. I really wouldn’t be a new buyer, because the timing just isn’t right. There is no defined trend for the broader market and, as we know, stocks have already gone up tremendously this year.

I still think the Dow can muscle its way to the 11,000 mark in the first half of 2010. It would be healthy if we got a solid correction before then. While I consider 11,000 on the Dow to be a full stock market recovery since the financial crisis, if it does get to this level, I would be wary about further capital appreciation until corporate earnings make substantial gains. The stock market’s been trading on future expectations of earnings growth and, in 2010, corporations will have to deliver or investors will sell.

Next year is going to be a very difficult environment for stocks and all capital markets. The stock market has already made most of its recovery, so further big gains will be more difficult. We’re also going to see the interest-rate cycle begin to reverse and this will become a headwind for stocks and bonds.

Two thousand and nine was the recovery year for the stock market; 2010 could be the year of the consolidation. It may be a transition year, as a lot of economic forces bear down on us to create a new, unexpected economic landscape. My gut is telling me that investors need to be very cautious over the next two quarters. Fundamentally, paying down debt and being hedged against inflation will be a better investment strategy than buying stocks in 2010. We’ll see what happens.