2010 Outlook for the Economy

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

The biggest difficultly employed consumers will face in 2010 will be higher interest rates. The prime minister of Canada, Stephen Harper, said it best this weekend when he warned Canadians that the era of interest rates being low is coming to an end, that interest rates will rise in 2010 and that consumers should budget for higher interest costs. I think this warning should be heeded by most industrialized countries.

For companies, higher interest rates will not be that much of a threat in 2010. This past year can be defined as a period when the great majority of companies realigned their costs. In particular, payroll costs were slashed. Two years ago, I wrote about how the recession would make American companies more efficient again because they would focus on trimming costs and doing more with less. And this is what happened.

For the most part, corporate earnings surprised on the upside in 2009…a trend I believe will continue for 2010. If it were not for a high employment rate and a glut of foreclosed homes on the market, our economy would be booming.

So, looking into 2010, I’m actually looking for a good economic year. I do expect interest rates to rise, but that will affect consumers more than corporations.

But I’d like to warn about one wild card: The stock market. The market rally that we have enjoyed since March 2009 will undoubtedly come to an end in 2010. The questions will be: “How far will it cut into the ability for companies to raise public money in 2010?” and “How will it affect the financial services industry?”

Yes, I’m very worried about the stock market for 2010. (You will read more on that in my 2010 Stock Market Outlook, which will be released in the first few days of the New Year.) So that is my biggest economic fear for 2010: how a return of the bear market will affect the psychology of consumers and businesses.

Michael’s Personal Notes:

Ever hear the saying, “Been there, done that?” Well, that’s how I feel about gold bullion these days. While many late-comers to the gold bull market are nervous seeing gold prices soften this month, take heart. Gold bullion has often displayed characteristics of a seasonal commodity.

In the years 2004, 2005 and 2006, gold bullion prices always fell in the month of December, just like they have in December 2009. Only in 2007 and 2008 did gold prices rise in the month of December, but remember those years were “soft” years for the gold bull market.

Gold is up 23% this year. I know of many gold stocks that have risen in excess of 100% this year. A little profit-taking and a little correction, in my mind, are exactly what gold bullion needs right now.

Where the Market Stands:

You are not reading much about the annual stock market “Santa Claus Rally” in the business pages of the newspaper and on the Internet, but this market sure does look like it wants to close out the year on the upside. This morning, the Dow Jones Industrial Average opens at 10,464, which is about a hundred points away from the Dow Jones’ 2009 intraday high of 10,566.

For the year, the Dow Jones is up 19.2%. In the immediate term, I continue to be more bullish than bearish. I continue to see the move by the stock market from its March 2009 low as a rally within the confines of a general bear market. While most analysts have given up on the rally over the past two months (wrongly so), I have continued to believe that the bear will give us higher stock prices in an effort to lure more investors back into the market. That’s how bear markets work.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.