Hope builds for stock recovery in new year? Pros share predictions

NEW YORK -- For most investors, this year can't end fast enough. Next up: 2009, which is a clean slate, a fresh start.

But the new year also inherits the same problems that in 2008 drove the Standard & Poor's 500 index down as much as 52% from its high — the worst bear market drop since the 1930s. The economy, 12 months into a recession, is on life support. Banks in survival mode are reluctant to lend. Consumers, spooked by job losses, dwindling 401(k)s and tighter credit, are hunkering down.

It is with that grim backdrop that USA TODAY held its 13th annual Investment Roundtable, picking the brains of five top investment pros about the outlook for 2009.

The panelists, despite scary headlines, say it's a mistake for investors to pull their money out of stocks and stash the cash under a mattress — partly because the mattress pays zero interest and partly because those investors will miss out on opportunities when stocks rebound.

"If you believe the world doesn't end that often, and you believe good companies don't disappear, I think it is actually a good time to invest," says Brian Rogers, chairman and chief investment officer at T. Rowe Price.

All the panelists predict stocks will end 2009 in positive territory. But they warn that the market is likely to trade in a V-shaped pattern, which means more scary plunges along the way.

The most bearish was Hugh Johnson, chairman and chief investment officer at Johnson Illington Advisors. He says investors should cut back their stock exposure until trends improve.

A key to the year is how successful President-elect Barack Obama's stimulus plan is in generating jobs and getting the economy back on track, says Linda Duessel, equity market strategist at Federated Investors.

Barring an economic hard landing in China, the badly depressed U.S. stock market offers some good values and could enjoy double-digit gains in '09, predicts Dan Chung, CEO and chief investment officer at Alger Funds.

Despite comparisons to the Great Depression, today's crisis, while serious, doesn't compare, adds Thomas Lee, chief U.S. equity strategist at JPMorgan Chase.

MARKET OUTLOOK: Will stocks earn a bigger return than cash in 2009?

Stocks are down 40% this year. Banks are failing. Some warn of a Depression. People are scared. Should they pull all their money out of stocks and put it under a mattress?

Hugh Johnson:Since it is so easy to be wrong in this business, going to such an extreme position under any market conditions is usually a mistake. But my rule is to never ignore the primary trends. And those trends are clearly very negative now.

Most long-term investors should have no less than 35% of their money invested in stocks and no more than 65%. I am not smart enough to know when we are at the bottom. So I am advising a very low exposure to stocks. If you have a higher stock allocation, or are closer to 65% and made the mistake of not reducing it, you should go to 35%.

Is cash really king?

Linda Duessel:Well, cash and the U.S. Treasury market. But you have to try to keep emotion out of this. My fear for the average American is that he will sell low, as many people did in October, and forget to get back in when the market rebounds and will buy high again.

Yes, this is the worst financial crisis we have seen in our lifetimes. People ask, "We were down 52% (from the high), should I sell now?"

We don't think so.

We think stocks will successfully retest the Nov. 20 lows of roughly 750 on the Standard & Poor's 500 index (vs. 880 Friday). But even if corporate earnings take a big hit next year, which we think they will, 750 on the S&P 500 still prices in a lot of bad news. If you are truly a long-term investor, and have an opportunity to buy stocks at a low price, even if the market goes down another 10% or 15%, it is time to peel back into the market.

Dan Chung:You are asking a market-timing question. Should we be in cash? When do we get back in? The answer is you should be in now, always and forever unless you have a two-year horizon. Don't try to time whether this thing ends in April or July or January 2010. The real issue is, where are the opportunities for investors now? Even at the end of Great Depression there was a 100% rally.

Johnson:Look at what dollar-cost averaging (a strategy of putting cash to work on a regular basis) would have done for you from 1929 to 1938. The market was down 54% during that period but if you put $1,000 in at the start of each year from 1929 to 1939, youwould have been up 6%.

Chung:It is important to remind investors that are seeking safety in short-term Treasury bonds or cash, that they are getting absolutely no return for that. If you miss something like the five or 10 best days in the stock market, your returns long term decline to basically zero.

Look at the volatility in the stock market. We got an 18% rally the week of Thanksgiving but gave up 9% in a day. That rally isa sign of what we will see on the up side when stocks turn.

How can one intelligently navigate this market?