2010 Stock Market Prediction – A Bear Market, But Maybe not in 2010!

by Rich Hamilton

In fact, things got so crazy, I’m surprised The White House didn’t get around to reclassifying counterfeiting as an act of patriotism rather than a criminal offense.

I don’t usually write stuff for “today”. I try to write stuff for Investingator that will be meaningful for years to come. Today, I’m changing that; I’m going to give a forecast.

I find it’s a good idea to put my ideas in writing. It forces me to sharpen up my understanding of whatever I’m thinking about, because I don’t want to be very wrong in public. (A little wrong is okay, but I’d rather not be very wrong.)

I began with the title; 2010 Stock Market Prediction, The Bears Have It, and I was going to forecast that, in a year’s time, the major stock indices would be lower than they are today.

As I wrote the article, however, my views changed as I realized that short-term thinking from policy-makers was likely to blow my initial bear market forecast off course.

Why did you begin with a bearish outlook?

You’ve got to know your history.

Bull markets are nearly always based on easy money.

Look at 2009, which surprised many investors by developing into a very strong bull market. In an almost complete absence of good economic news we saw a tremendous market rally caused by the Fed pumping out money even faster than Ben Bernanke’s helicopters could throw it at the banks.

The banks invested easy cash in a market rising, in chicken and egg style, because of the very cash Bernanke threw at them, and – despite the grim looking “real” economy, (you know, the one with actual unemployment at 16 percent) – record-breaking bonuses have come around for bankers yet again.

In 2009 the United States and much of the West was awash with a tsunami of cash flooding from the orifices of spendthrift central banks and governments. In fact, things got so crazy, I’m surprised The White House didn’t get around to reclassifying counterfeiting as an act of patriotism rather than a criminal offense.

The Fed, however, is scheduled to stop its printing presses Quantitative Easing program in March.

The Bank of England is scheduled to end QE in February.

These moves mark the end of easy money and that should be the end of the Bull Run.

So, I could stop writing now with a prediction of a bearish 2010… but things aren’t that simple.

Will the Fed pull the plug on Quantitative Easing?

Why on earth should the Fed stop the QE program?

Right now, QE is all plus and no minus.

If the Fed were to stop its QE program, the calamitous mortgage debt market, currently propped up with printed money, would need to be financed by private funds. Private money would demand much higher interest rates than the Fed does. If interest rates were to shoot up, an already drowning economy would be pushed into deeper recession.

BUT, if the Fed keeps the QE program running, the short-term outlook seems rosier. (And who cares about the long-term these days anyway?) The inflation risk is muted because capacity utilization in the economy and worldwide is very low. Sixteen percent real unemployment is not the best-known driver for inflation. Of course, we’re pushing government debt up to ever more ludicrous levels, (but our grandchildren can pay for that!) and we’re allowing the sort of imbalances that lie at the root of today’s problems to develop again. But forget all that – these are problems for the future. (Ben Bernanke – who may or may not soon be confirmed for a second term as Fed Chairman – was a major player in the policies that led to the first debt-fuelled collapse.)

Of course, when capacity utilization and the velocity of money circulating in the economy pick up, we’ll endure a wave of severe inflation and all the crippling economic pain it will bring. Economic vitality will be stifled for years by the debt burden hanging over us. But that’s not going to be the current administration’s problem. Someone else will have to deal with that.

Therefore my guess is that the Fed, under a re-elected Bernanke, will renew the Quantitative Easing program and leave it to someone else to pick up the pieces.

So here’s my prediction:

If QE finishes in March, the stock market will end 2010 lower than it began it.

If QE continues after March, the continuing flow of easy money should prevent an immediate bear market developing, but imbalances in the economy will continue to grow and, when it comes – I don’t know when that will be – the resulting bear market won’t take any prisoners.