For 2009... Recession... Or Recovery?

It certainly is easy to bid good riddance to the year 2008, but can we look forward with unobstructed vision in 2009 for both a strong economic and investment market recovery? The reality is that it just will not be that simple! We do need, however, to be happy that 2008 is finally behind us. The Dow Industrials fell 33.8% representing the biggest annual fall in 77 years. The S&P 500 dived 38.5% which was the worst performance since 1937. Rounding out the major averages, the NASDAQ fell 40.5%. It was a year where conventional wisdom was not good enough. Age old advice to diversify and stay the course simply didn't work. Even for active market traders, being nimble in their moves could not save them from the train wreck that investors experienced. The global economy and financial markets have suffered their worst stretch in decades.

So it is now 2009 and, yes, many of last year's problems still remain front and center. However, while we are faced with old challenges, there is the hope of bold remedies as we move into the year. The economy will dominate headlines and the expectation is that the right moves out of Washington may help to make the news brighter by late summer. Work is certainly cut out for the policymakers as we enter the New Year as consumers aren't spending, banks are reluctant to lend, and factories have curtailed output. Realistically, job losses should continue for several months with unemployment expected to exceed 8%.

President–elect Obama takes over a country in the midst of a full blown recession with the Treasury Department and Federal Reserve still trying to repair a historic financial meltdown. He is attempting to craft a massive stimulus plan which appears to include such things as infrastructure spending, aid to states, and some tax rebates or cuts. Its size, though, could possibly be a problem getting through Congress. In his favor, however, is the fact that the Democratic Party will now call the shots at both ends of Pennsylvania Avenue. Since 1980, Democrats have controlled both Congress and the White House for just two years, the first two years of the Clinton presidency.

Political analysts point out that Barack Obama is the first Northern liberal to win the presidency since JFK and that Capital Hill is the furthest left in decades. That could be the ingredients for more spending, more debt, more financial regulation, and even the possibility of nationalizing lending risk and losses. In what may become a new era of government on steroids the unknown is where this expansion of government will stop.

Our hope is that the new president can follow through with his emphasis on domestic issues. That was President Bush’s plan when he took office in 2001 and by the end of that year we all know the agenda was dramatically changed. The world remains a dangerous place and a big question is what will be Obama's first big international test? In a quote from Vice Presidentelect Joe Biden shortly before the election: "mark my words, it will not be six months before the world tests Barack Obama like they did John Kennedy. The world is looking... watch, we're gonna have an international crisis, a generated crisis, to test the mettle of this guy." There is little doubt that foreign policy will present big challenges to the new president and his administration. We can only hope that should an international event occur, the "distraction" does not dilute the momentum of a rebounding economy both domestically and globally.

Many economists are expecting a tepid recovery to begin at some point during the second half of the year, depending on how quickly the stimulus efforts can take hold. The good news is that stocks typically start to move higher several months before a recession ends. In this case, a sustained stock uptick in prices could be evident in the latter part of 2009, or maybe as early as late summer.

What will be interesting to observe when a recovery begins to take hold will be whether the consumer will be adopting a new mind set. The country has experienced a two decade spending spree which came to a screeching halt in 2008. The soaring unemployment, tight credit and other economic woes forced consumers to cut back. But long after the recession and credit crunch fade, consumers may remain more conservative. For a generation, Americans expected to always get richer and that credit would always get easier. However, household wealth has fallen for four straight quarters, including a record $2.8 trillion in the third quarter of last year, as home and stock prices have sunk. Consumer debt declined for the first time since records began in 1952, reflecting tapped-out or fearful lenders and borrowers. The end result to all of this may be that Americans begin to save more and spend less. Only time will tell.