In the financial markets I expect more of the same. Oil prices will continue to move upward. Big Wall Street banks will announce another round of billion-dollar write-offs. Earnings season will be marked with more than its usual number of disappointments as rising raw materials and energy costs cut profits. (For more on this, see my July 1 column, "Why Pepsi can rebound but GM can't.") Inflation will continue to creep upward, and the Federal Reserve will continue to threaten to raise interest rates.
In the economy, expect more of the same but a little bit worse. The credit crunch has moved down the pecking order until it has hit community banks, which are now cutting back on lending. Gasoline selling above $4 a gallon sent car sales to a 10-year low in June, and optimists are looking for a turnaround in sales in 2009. Every retailer but the deep discount giants such asis reporting sales growth below projections.
And worst of all, it now looks like employers are finally starting to cut jobs rather than just reduce hours.is projecting that unemployment will top out at 6.4% in 2009. At the end of 2007, the consensus among economists was that unemployment would peak at 5.6% or so near the end of 2008. Goldman's most recent forecast, then, calls for a slowdown that is slightly longer -- an extra six to nine months -- and slightly deeper.
Waiting for the end of the bearI don't see the end of the world in any of this. Sure, stocks are likely to be lower in two months than they are today, but I don't put the odds of a big stock market crash at more than 10%. Why so low given all the problems? Because all the problems are pretty much out there. Investors -- and the CEOs at banks, insurance companies and mortgage lenders -- are in denial about the extent of the problem, but they're not going to get blindsided by any of this.
What the markets will witness is a continued flow of grudging admissions by company executives and investors that the problem is bigger than they've let on. A typical one might say: "I know we said that last quarter's $2 billion write-off was the end, but this quarter we really mean it. This $4 billion write-off is absolutely the end of the problem."
And will anybody be really surprised if after all this time, the economy really does slip into an official recession? All the experts have predicted a recession so often that the actual arrival of the beast is likely to be anti-climactic. And how big a difference is a shift from 1% growth to a 1% decline in the size of the economy going to make? We're not talking Great Depression here, OK?
What I am talking about though is a market where the overall market and the major indexes will continue to grind lower. That will make it hard to make money by putting your money in investments that track the general stock market. At the same time, low returns from the general market will make it hard to recover from a loss, so the return on risky investments isn't likely to justify the risk. This is a time to be extra picky with your stock choices and to concentrate on just a few companies in circumstances that make it likely they'll outperform the average stock in a slow economy.
But I do think there is some good news in this scenario. We aren't at the bottom yet for the stock market, but patient investors don't have all that long to wait. The stock market always starts to recover before the economy does: The market prices stocks on the anticipation of future growth or earnings or dividends. That lead time is on average about six months. If the economy makes a bottom in 2009, the stock market could be expected to anticipate any recovery as early as the end of 2008.
Right now I'm starting to see a lot of advice saying that we could see the bottom in stocks as early as the historically weak months of August, September or October. I think that's early. Watch out if that prediction becomes the conventional wisdom. That would be a setup for one last bear market rally, the last good chance to lose money in this bear, and then a final washout.
For the next few months as I wait for the bear to grind toward a bottom, I'm going to concentrate in Jubak's Picks on:
- Keeping my powder dry. I've got 33% of the portfolio in cash now, and I'd like to have about that much cash on hand when I'm sure it's time to buy.
- Improving the quality of what I do own by weeding out the underperformers that aren't headed toward a profitable comeback.
- Using the funds from that weeding to buy a few stocks that I think are likely to be the leaders of the next market, that are selling at reasonable prices now and that have limited downsides.
This last task will be difficult, but I'm willing to sink some time and money into it to reduce the odds that I'll do something big and stupid. Doing nothing, even when it's the right thing to do, is really, really hard on an investor. I know that from past experience.
In a market like this one I'd like to do just enough to make my portfolio better and to fend off any case of itchy trigger finger that might lead to a temporary collapse of discipline with painfully expensive results.