Will It Be A Watershed Year?

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OCEAN CITY – In the first quarter of 2009, many investors thought the economy couldn’t get much worse. But then came the rest of the year — in which the economy saw marked improvement, including a dramatic stock market surge and Federal Reserve Chairman Ben Bernanke’s announcement in September that “the recession is very likely over.” Still, worries about jobs, housing, consumer confidence and spending linger as 2010 begins.

While acknowledging that there may be bumps and fitful progress as the economy moves forward, BofA Merrill Lynch Global Research’s top analysts and market observers foresee 2010 in largely positive terms, with an improving global outlook and growth opportunities for investors who are willing to re-enter the markets now, rather than waiting until the economy regains its footing.

The still-rising unemployment rate in particular has led to questions about the durability of the economic recovery that began during the second half of 2009. To Ethan Harris, head of North America Economics for BofA Merrill Lynch Global Research, such fears seem overstated. "This recovery has the earmarks of something sustainable," says Harris. "We believe the equities and credit markets are well positioned for the year ahead. The economy may be advancing somewhat weakly, but it is advancing." Meanwhile, inflation is low, and the Fed will be waiting to tighten interest policy until the economy is clearly on a path back to full health. The primary threat to a lasting recovery would be a revival of the credit crunch, which could lead to a second recession. But Harris doesn’t expect that to happen.

Nor should a return to growth be seriously stalled by a stock market correction that could develop in the coming months, says Mary Ann Bartels, head of U.S. Technical Analysis, BofA Merrill Lynch Global Research. "Stocks may well take a breather, but you have to put that into perspective," she says. "In 2009 we witnessed the greatest rally of our lifetime. From March 6 to October 21, the Standard & Poor’s 500 rose 60% without experiencing even a 10% correction. The last time that happened was in 1933."

Many investors who intellectually know the importance of staying invested have been understandably reluctant to venture back into equities. Michael Hartnett, chief global equity strategist and chairman of the Research Investment Committee, BofA Merrill Lynch Global Research, thinks most investors will eventually return, but perhaps not during 2010. "Many investors reacted to the drop in the markets by shifting from an overly aggressive position to a very conservative one," Hartnett says. "A number of those people are not yet convinced that the economy is regaining its footing. It may take several years of growth before they feel comfortable returning to the stock market."

That very caution, of course, creates opportunities for investors able to look past temporary concerns and begin rebuilding their portfolios for the long term. And although last year’s economic crisis seemed to attack almost every sector and kind of investment equally, this recovery could reward those investors who put a premium on choosing the right individual stocks, Hartnett believes. "If volatility continues to decline through 2010, as we believe it will, the importance of assessing each company and stock according to its own merits becomes much clearer," he says. "Instead of every stock, good or bad, going up or down 30%, you’ll get a lot more differentiation."

Indeed slow, steady progress is likely to be the prevailing theme in many areas during the coming year, as the global economy continues to distance itself from its recent stormy past.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

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