First Half of 2009 Over: How Did we Do?

by JDH on July 4, 2009

Happy Independence Day to all of my American readers. (For you trivia buffs, in the last month this site has had readers from 59 countries. 45% are from Canada, 37% from the USA, 2% from the UK, and 16% from 55 other countries). Here’s hoping the weather is warm and the drinks are cold in your corner of America.

Now, to the business at hand. Last December I asked readers to predict where the market would be at the end of each quarter of 2009. On our 2009 Predictions Page I summarized the consensus estimates for where the market would be at June 30, 2009: On average, readers of this blog believed the Dow would close at 8,349, and the price of gold would close at $984.

The actual closing values, on June 30, 2009 were 8,447 for the Dow, and $926.60 for gold, so on average we were too pessimistic on the overall market, and too optimistic on the price of gold.

Congratulations are due to Davidslane, winner of the “closest to the pin” contest, who predict the Dow at 8,600, and gold at $920. Considering that prediction was made over six months ago, getting to within $6 of the price of gold, and within less than 2% of the Dow’s closing level is amazing. Well done.

Honorable mention goes to Designer, who predict gold at $910 and the Dow at 7,900, and Croaker who predicted gold at $950 and the Dow at 8,000. REM‘s Dow prediction of 8,242 was close as well. Who needs to watch professional forecasters when we have readers who do a better job than the experts?

How did I do? Not well. I predicted gold at $1,800 and the Dow at 6,000, so I was much more pessimistic on the economy than warranted. I assumed that there would be a follow through on the carnage from 2008, with the markets bottoming out around now, with a recovery happening later in the year. Instead, government stimulus efforts have created hope in the minds of investors, which has lead the markets higher in the second quarter.

Personally, I believe it’s all an illusion. Deficits are at record levels, consumers are falling behind on their credit card payments, and the real estate market is no where near a recovery. The Dow is down over 5% year to date, so I was correct on the direction, just wrong on the magnitude. Gold started the year around $880, so again, I got the direction correct, just not the magnitude.

Was I wrong, or just early? Obviously I was wrong; the markets did better than I expected. However, I also believe I was early. Crashes happen, then there are corrections, then further weakness occurs. The crash happened in 1929, but the market didn’t bottom until 1933, and a true bull market did not return for many years thereafter. The crash of 2008 has, so far, not been followed by a crash of 2009, and it was unrealistic of me to expect that quick a result. A more likely scenario is continued weakness this year, with perhaps a big correction in the fall, or early next year.

There can also be little doubt that the government’s actions have reduced the damage from the weakened economy. 52 banks have failed in the U.S. this year, representing almost 3,000 branches. That’s a greater number of failures than at this point in the Great Depression, but because, to date, the FDIC has covered all deposits, no depositors have lost money. They aren’t feeling the pain. But what happens if another 50 banks fail in the second half of the year? Does the FDIC have unlimited money to keep covering deposits? Or will the time come when the money runs out?

Can stimulus spending last forever? Will interest rate remain near zero forever? How long can the country last with 10% unemployment? If the rate of personal bankruptcy growth continues to accelerate, does anyone truly believe that the recession is over?

I therefore reach the conclusion that I am simply early in my predictions of doomsday, not wrong. I will therefore continue to hold cash and wait for further weakness to add to my positions. For the first six months of this year, holding cash and gold and silver stocks, my portfolio is up over 4%. That’s not spectacular, but it’s better than the general market, and it’s done with minimal risk, so I will stick to my strategy.

Time will tell if I have missed the boat, or if I was right to stay on shore.

Thanks for reading, happy Fourth of July, see you next week.