Fundamentals Will Return to Favor in 2009

December 31, 2008

Sector Report: Retail

While you were out doing your holiday shopping, I'm sure you saw all the big markdowns and sales at the mall that were meant to entice consumers. But most reports indicate that even those deep discounts failed to lead to strong sales this December. Still, despite all the doom and gloom about holiday sales, the bottom line is that consumer spending could ramp up in the first half of 2009. Falling prices on goods, coupled with the recent uptick in personal savings and the decline in household debt, means consumers have a much better chance of ramping up spending in the near future than most economists believe. Don't get me wrong–this does not mean retailers are out of the woods yet. But it looks like the overall spending scene is healing slowly. Consider that durable goods sales dropped by just 1% in November–or that lower oil prices and dramatically lower interest rates together are equal to a more than $1 trillion stimulus program for consumers around the globe.

Sector Report: Health Care

This sector has become increasingly dominant in my Emerging Growth portfolio because it is recession-proof. People will cut back on just about everything before they eliminate their prescription drugs or other treatments, so this industry will stay strong even if the recession lingers into the second half of 2009. But there is a catch–since health care reform was one of Barack Obama's big pitches during the election, there will certainly be some change over the next few years in this industry. You should avoid investing in health care providers whose margins could be hurt by any effort to mandate coverage or nationalize health care. I also advise steering clear of major pharmaceutical stocks with drug liability issues like Merck, which is still reeling from Vioxx lawsuits.

Sector Report: Housing

I own a home in Florida, and I can tell you firsthand how much home values have plummeted in the Sunshine State. Hopefully you're not in the same boat I am! Unfortunately, if you think the housing market can't get much worse after an abysmal 2008, think again. U.S. homebuilders slashed construction of new units in November, with starts dropping a whopping 18.9% to a seasonally adjusted annual rate of 625,000, the lowest since the Commerce Department began keeping records in 1959. There are just fewer buyers right now, and even some of the buyers can't get the credit they need. The real problem in housing is in inventory, and though pending home sales tightened up a bit in October, they are still on the decline. The bottom line is that everybody knows prices are falling, so nobody buys anything because they know a home will be much cheaper in a month or two than it is today. These massive drops in new home sales can't make up for the huge inventory that is growing with each batch of foreclosures, and I see no bottom to the housing market in the first half of 2009.