At least so far, 2009 has been a welcome relief from the pain that 2008 inflicted on most investors. If you want to get a jump on tomorrow's winning investment strategies, though, you need not only to think about today's trends but also to try to anticipate future trends in 2010 and beyond -- and what impact those future trends will have on various types of investments.
Right now, investors have the best of everything. Stocks have bounced off their March lows with hardly a pause in their upward advance. The dollar has fallen sharply, giving investors in international stocks a big tailwind and helping to flare rallies in gold, oil, and other commodities. Low interest rates have kept bond yields relatively low, and although Treasuries have given back a good part of their huge gains in 2008, hard-hit junk bonds have put in a major comeback to post large returns of their own.
Periods like this, in which just about every investment available does relatively well, happen from time to time. Unfortunately, they always end. Although it's impossible to know exactly when the next phase of the cycle will come around, here are some things you need to be ready to see in the coming year.
Trend #1: Interest rates -- nowhere to go but up?
When historians look back on the first decade of the 21st century, the low interest rates that prevailed throughout much of the period will take center stage. After setting the federal funds rate at 2% or below for three full years from 2001 to 2004, the Federal Reserve again turned to lower rates early last year and seems poised to keep them at rock-bottom levels for an extended period.
At some point, though, interest rates are going to rise. Here's why:
- When the economy turns around, the need for ultra-low rates will disappear, and the Fed is likely to look at inflationary concerns to justify raising short-term interest rates.
- Regardless of the Fed's actions, however, huge amounts of government borrowing have greatly increased the supply of Treasuries. Although Federal Reserve purchases of long-term Treasuries have helped keep rates at moderate levels, these extraordinary actions will need to cease at some point -- and the resulting reduction in demand should result in a new equilibrium at higher rates.
Banks like Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) have benefited from low interest rates and a steep yield curve. Once rates reverse course, however, they're going to see profits constrained. If banks haven't found stability in core businesses like consumer lending by then, then you can expect to see bank stocks come under pressure.
Trend #2: Quality will come back into style.
So far this year, the stocks that were hardest hit during the recession have been among the best performers. Companies like Las Vegas Sands (NYSE: LVS) and Hovnanian (NYSE: HOV) have seen their shares multiply many times in value in just months.
Meanwhile, stocks like Procter & Gamble (NYSE: PG) and Abbott Labs (NYSE: ABT) have languished in relative obscurity. After holding up reasonably well during the downturn, these stocks haven't missed out entirely on gains. But they're nothing compared to what you've seen from formerly endangered companies that came back from the precipice.
Momentum runs can last a long time. Once the euphoria ends, though, people will again seek strong fundamentals and good values from stocks. Given that Johnson & Johnson (NYSE: JNJ), P&G, and Abbott are just a few of many stocks trading at 15 times earnings or less right now -- even in a lousy economy -- it's only a matter of time before investors gravitate back to blue-chip stocks.
Just wait 'til next year
An old investing maxim says that "the trend is your friend." Countless investors have turned great ideas into financial ruin simply because they underestimated how long an existing trend would take to change direction. So I'm not saying to take action while you're still hung over from your New Year's champagne.
Eventually, though, trend reversals happen. The difference between getting in early and missing big parts of big moves comes down to whether you're prepared for those reversals. If you are, you can cash in when the time comes.
Alex Dumortier thinks we're in the mother of all bubbles. Read how you can protect your assets when it finally pops.
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