The Most Important Thing to Do Going Forward

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

The Dow is now trading around the same level it did in 2004 and 2005. This is also the same level the Dow traded at in 2000 and 2001. I think I see a pattern forming here.

In my mind, the strength of the stock market since the March low this year has been truly spectacular. This dramatic price performance is only outdone by the dramatic corrections in October last year and in February this year.

By far, the best and easiest trade this year was just buying the index when the market collapsed. Few had the courage to do so. The crisis in confidence brought about an enormous reluctance on the part of investors. The buy-low (hopefully sell-high) investment strategy was apparent, but few actually made the bet.

While not exact, there is a mirroring effect going on in the broader stock market. While the strength of the two major selloffs over the last year were significant, so was the upside price performance of the broader market since establishing its low. If you pull up a two-year chart of the DJIA, you’ll see that the mirroring price strength suggest the Dow should easily surpass the 11,000 level. This isn’t too much of a stretch for the index and I think it’s got a good chance of achieving it. If this does happen, my view is that the stock market has made a full recovery. It will have returned to its previous equilibrium.

Once the previous equilibrium is achieved, then I think it’s anyone’s guess as to what the broader market will do. The year 2010 could bring about a period of not much action at all. One big choppy trading range is my current expectation for next year.

There are a lot of structural challenges that the economy faces if it wants to return to a period of sustainable growth. The economy still hasn’t had the opportunity to correct itself. This includes all major aspects of the system: the housing market; consumer debt; government debt; the banking sector; manufacturing inventories; etc. There is a lot that needs to be fixed before GDP can accelerate in a meaningful manner.

I’m not bearish on the future; I’m realistic. I’m always bullish on entrepreneurship and investment opportunities in the stock market, but my Main Street view is quite lackluster until the economy corrects itself further.

The health of the housing market is the key Main Street indicator for the future. Inflation is coming; in fact, it’s here already. With the interest rate cycle about to reverse in 2010, the best thing an individual or a family can do going forward is try to pay down as much debt as possible. This, in my view, is the single most important “corrective” action that we all must take.