Thomas Oliver: Advisors cautious about 2010

By Thomas Oliver

The Atlanta Journal-Constitution

During this year of rising unemployment and foreclosures, the one bright spot has been the stock market.

If the value of our homes continued to take a beating, at least our 401 (k) s have recovered some of their losses.

But in the devilish way math works, after the markets lost 50 percent in the Panic of 2008, a 60 percent increase this year still leaves us about 25 percent shy of where the fall began.

But let’s not get greedy all over again. This year’s run up in stock prices has been grand by any historical measure. It’s been so good that few, except for the TV stock market evangelists, would suggest a repeat in 2010.

In fact, some are concerned that this might prove to be a head fake.

“We are concerned that this so-called bull market might actually be a bunch of bull,” states Dorsey Farr of Atlanta-based French Wolf & Farr. “Many bear markets have been interrupted by sharp rallies, only to be followed by another decline.”

Indeed, the second best year in Dow history was 1933, two years after the worst year on record.

Farr is concerned, as is Adrian Cronje, chief investment officer at Balentine LLC, that the rally since March has been led by less than quality equities.

“By many measures, this has been the flakiest rally in risky assets on record, meaning it has been driven by the junkiest, lowest quality stocks and bonds,” Cronje writes me. “This poses the question whether irrational fear has not turned into irrational optimism.”

Phil Larkins, senior portfolio manager at Northern Trust, in Atlanta, believes investors can expect steady “if not spectacular” economic growth. But below average consumer spending will retard the push that the rebuilding of inventories and government stimulus might otherwise provide.

Farr thinks we can expect a “so-so year” for our portfolios. He believes a 7 percent return would be a victory.

Cronje is worried.

“We worry that we are currently in the eye of the storm, having passed through the first wall in 2008, and looking to pass through the second wall in 2010 and beyond, as the authorities attempt to remove the experimental medicine they have applied to stabilize the patient in a credible and timely way.”

All three, as usual, advocate a balanced, diversified portfolio.

Larkins reminds us that portfolios should become more conservative as we age. A rule of thumb suggests the percentage of bonds should equal your age.

Reflecting the high degree of government and Federal Reserve involvement in the economy and markets, and what that could mean for inflation when it’s withdrawn, all three recommend inflation protection bonds, such as Treasury Inflation-Protected Securities, or TIPS-like funds.

Larkins and Farr like foreign equities or international stock funds. Cronje sees value in the stocks or funds of “large cap family favorite names with strong balance sheets and cash flow.”

Recalling the 18-month equities massacre from late 2007 to early this year, one should remember that money market funds allowed many to ride out the storm, mostly unscathed.

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Thomas Oliver writes the Sunday business column. He can be reached at toliver.writeright@gmail.com