Last year I laid out my prognostications for 2009 and all but half of one was correct. Of course, this past year was a relatively easy one to see directionally what would happen working under a single assumption that the sky would not fall forever. The result is that 6.5 out the 7 prognostications were on target. What did I miss? Read on. The original text is listed and the follow up commentary is italicized.
- Economy - the economy will begin its recovery in the latter part of 2009 with this recession coming to an end before March 31, 2010. The recovery is definitely underway, albeit at a pace that resembles a snail running a marathon. CHECK!
- Interest Rates - the Federal Reserve will hold rates steady for the first part of the year, and as the economy shows signs of stabilizing, will begin to raise rates near the end of the year. Rates were steadily near zero for the entire year, but there were no rate increases. 1/2 CHECK.
- Inflation - with the global recession in full swing, inflation will remain tame for the entire year with only mild spikes in commodities prices. Inflation? What inflation? Consumer prices were nearly in a comatose state. CHECK!
- Deflation - a month or two of declining prices may occur, and these numbers are more likely to produce sensationalized headlines in the media than cause real duress for the economy. You might not have noticed, but we actually experienced deflation last January. Fortunately it was very short-lived. CHECK!
- Stock Market - equities will lead the major asset classes with positive returns in excess of 10% for the year. The S&P 500 returned 26.46% in 2009, a little better than 10%. CHECK!
- Fixed Income Market - corporate bonds will lead the way as bondholders realize many of these bonds have been unfairly beaten down in the marketplace and double digit returns are not out of the question. This was my favorite part of the market last year. The lower the credit quality of your bond portfolio, the greater your return. Here are a few examples from lowest credit quality to highest credit quality. Fidelity High Income (SPHIX) returned 51.46% with average credit quality of B (pure junk). Vanguard Intermediate-Term Investment Grade Bond Fund (VFICX) returned 17.71% with A-credit. Bond Fund of American (ABNDX) returned 14.91% with average credit of AA (high). CHECK!
- Cash Equivalents - I bonds will continue to be the best place for cash equivalents with high yield FDIC insured bank accounts in second. Even though I Savings Bonds yielded nothing for half of the year, they still managed to out pace high yield FDIC insured bank accounts. Currently, you can grab a yield of 3.36%. CHECK!
Last year was much easier to predict than this year, but I'll have my 2010 prognostications out there later this month.
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