Now that those silly New Year's resolutions, the ones you never really intended to keep anyway, have fallen by the wayside, it's time to take a more serious look at the year ahead. Over the last year, the market has rebounded nicely; the S&P 500 increased 23%, and the financial sector has stabilized. But the rear view mirror won't provide the foresight we need to make better decisions. Here are seven things to look for out the windshield in the coming year.
The Department of Labor announced that the economy lost 85,000 jobs in December, but the official unemployment rate remained at 10%. The reason the rate didn't change was that more people fell out of the definition of the work force so they weren't counted. If we count everyone, including those who have given up looking for work, the rate is 17.3%.
However you look at it, the news wasn't good; the gains that added hope in November reversed in December. If you kept your job, made it through the worst of it and think you can relax, don't get too comfortable just yet. (Preparation can help you land on your feet after being let go. Find out more in Planning For Unemployment.)
Speaking of getting too comfortable too soon, the economy may not be in recession, but robust growth isn't here either. Company profits have been riding on costs cuts, not top-line revenue growth. And with the lack of lending and the end of some of the fiscal stimulus, it's difficult to see the GDP going gangbusters from here. For the economy to really get going, it needs to be led by consumer demand. Look for signs of that picking up before the economy significantly improves.
With the major banks clamoring to pay back their TARP money in order to pay themselves huge bonuses, greed clearly hasn't gone away. And now that they are free of government restraint, look for even more greedy behavior going forward. While much has been said about the need for financial reform, nothing significant has actually been done. The forces of greed have strung out the debate of what to do for so long that it's unlikely anything will be done to forestall the greed in the executive offices.
Look for a lack of serious reforms and you'll know that greed won the day.
While many lost their appetite for risk when housing turned sour, Wall Street and the major financial firms still love gorging at the trough. It seems that the dollar carry trade is still on, as the markets tend to rise when the dollar falls. The unwinding of this trade could prove troublesome for markets. Risk taking is alive and look for some of those risks to go awry.
With the market up and the economy seemingly sputtering along toward recovery, the inclination is to look ahead and project the recent past into the future. This would provide a picture of another year of 20% plus gains in stocks, GDP escalation and a jobs recovery.
But those expectations could already be priced into the markets and, if so, if those expectations aren't met, a sell off could appear and surprise those that don't remember that a bump along the road to full recovery could send your portfolio back into the ditch. (Find out how this tough economic period can be a learning experience for all in The Bright Side Of The Credit Crisis.)
The impact of upcoming elections is unknown, but it's certainly something to keep our eye on. We should see the end of the health legislation push, one way or the other, then the drive for more jobs and economic recovery will likely lead us into the midterm elections. While the elections themselves can have impact, the debate during the campaign season is also important. Look at the rhetoric about how good or bad the economy is doing as it can impact consumer sentiment and therefore economic activity.
While there has been no real evidence that we can trust financial services firms, politicians or any prognosticator of the future, we often act as if we do have trust. Even though we don't trust our financial institutions, we still do business with them. Even though we don't trust our political leaders, we still vote for them. Even though we don't believe that anyone can really know what's going to happen, we listen to self-appointed pundits as if they have a crystal ball.
If there's one thing that you should be looking for going forward, it's how often you trust people that haven't earned your trust and don't deserve it.
The best advice for the new year? Stop trusting people that don't deserve it. Now there's a resolution worth keeping. (The misery index measures a combination of unemployment and inflation, but what does it mean for your finances? Check out The Misery Index: Measuring Your Misfortune.)