December 14, 2009. - The past year of
turbulence, when the market faced the bottom of an abyss, is ending.After a vigilant rebound, Americans go from a year rife with fearful anxiety into next
year with limited visibility hoping to find the new market.
Despite improving
sentiment, 2010 is encumbered with lingering challenges that will weigh on the
economic turnaround throughout the next year. Residue from the destruction and heightened uncertainty
has left pundits hesitating to call what forces will drive the economy and
markets forward.And prognosticators are
unable to come to a confident consensus where the real demand and prices will
land.
The year will be one
of testing, re-pricing, and repositioning.Markets will be tested for their ability to steady prices, confidence
and expectations.Investors will search
for confirmation that market strength has returned without life support.
Before moving out of
the current range where asset valuations were re-priced during the market’s
collapse, lower resistance levels must thwart off pessimists with a real show
of support from institutional investors.
These are the main tests
and hurdles the market has to work through next year to make a breakout from those
ranges set in 2009.
From Freeze To Thaw
After a spending
freeze and demand decay, consumer and corporate sentiment will seek assurance that
job creation is underway, while investors watch for signs of improvement in demand
to increase earnings.
As corporate
executives adjust their risk exposure, spending should increase, but at a cautious rate as consumers crawl out of hibernation.
The outlying threat
of rising interest rates should pressure banks to start lending to small and
mid-sized businesses.Bank earnings might
stall from the additional debt burden.However,
the reallocation to businesses should improve the unemployment rate and boost
consumer spending.
Pricing the Market
The rebound in the equities
market, pulled up by the investment firms, stabilized corporate and portfolio
asset valuations.Going forward, the
ability for valuations to hold these levels and move forward without federal
stimulus will be tested.Continuing or
increasing stimulus will prevent needed validation of the markets’
sustainability.
Earnings propped up by
the Fed’s programs or over-optimistic markets could slow mergers and
acquisitions needed to consolidate the excesses and firm up sectors.
Pricing of products
also need to firm up without promotions.Consumers continue to scoop up sales and deep discounts while retailers
throw out gyrating prices to test real consumer demand.Any increases in retail earnings need to reflect
improved sales in the top line growth.
Lingering Uncertainty
Companies continue
to wait for final details of tax and healthcare reform.But most analysts will start shifting their
attention to the agendas in the upcoming campaign season that are likely to raise
concerns of other proposals on the table.Any increase in social movements and unrest surrounding unions,
cap-and-trade, and healthcare could impede improving sentiment if pessimism returns
to increase uncertainty.
If no clear trend is
established in the first half of 2010, analysts will start looking beyond next
year for signs of inflation, another shoe to drop, healthy global growth, and
any undiscovered lag effects that might raise their ugly heads and hang over
the markets.Even though unemployment
is considered a lagging indicator, doomsayers could thwart consumer sentiment
if the economy is not on a solid upward swing.
A wait-and-see
attitude will most likely persist with the economy showing modest growth, and a
flat market, as these uncertainties continue to be answered and worked through.
Any positive confirmation that a sustainable
recovery is under way could unleash optimism and capital waiting to go to work.
One thing for
certain when looking forward, the new normal will be restructured with new
winners rising from second tier into first tier.Mergers and acquisitions will identify stronger
leaders in an environment framed with a new baseline.And investors re-entering the market will
surely catapult the next leading sector or hot story with redistributed
capital.