What if 2009 is worse than 2008 for the markets?
By all measures 2008 was one of the worst years financially for many investors. While we have seen huge drops in the markets before (1929, 1987, 2000) the fear and volatility in the market was unprecedented. Now many investors are looking to a new president, government bail-outs, and economic stimulus to provide a booster shot into this spiraling economy. But what if we are entering a new paradigm and 2009 will only serve to widen our view of failures and deepen our losses?
For decades public companies have operated under highly leveraged environments which helped maintain growth and innovation, but with much if not all of that leverage now gone, how will these once behemoth enterprises compete? What is the earning power of XYZ Corp. in the new world?
Lower revenues, higher interest rates, and tight liquidity must have some companies rethinking their entire business model (think GM). These companies can not simply go back to the well that is the capital markets either. Current valuations make equity deals unattractive to say the least and the bottom line is cash is in, credit and equity is out for 2009.
What will 2009 look like for the markets and the U.S. economy as whole? No one knows, but my concern is that too many people are talking about a bottom rather than a change to their investing methods. 2009 will likely be a traders market with bargain hunters buying up battered stocks and stock pickers carrying on with business as usual. I think there is a bigger shift coming in the markets. A shift backwards. A gaining focus on sound business models not predicated on growth for growth’s sake. Valuations with multiples that remain in the single and double digits. And overall profits and cash flows. It’s amazing the string of failures, corporate corruption, and weak performance that investors and the public got used to in 2008, but I look forward to the coming year where rational and conservative strategies may return.
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