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How to Invest for the Rest of 2009

By Tobin Smith

Each year I send an e-mail to my friends and family containing my economic and stock market forecast. I send it to make sure that everyone I know understands my market forecast, why I am bullish or bearish on stocks, and what my basic advice is for building and protecting their financial wealth.

The other reason I send this e-mail to everyone is so I never have to hear my friends or family members say, "Geez, why didn't you tell me what was going to happen in stocks," when I see them on the golf course or at a dinner party.

In my January 2008 message, I made the following points:

• Our proprietary ChangeWave Alliance macroeconomic surveys showed that the United States was in a consumer-led recession.
  
  
• A bear market for stocks would precede this recession, with my worst-case scenario being that stocks would go down to 1997 valuations.
  
  
• This recession would be much deeper and longer than the 2001-02 recession, because that one did not involve the consumer.
  
  
• The financial tsunami of subprime mortgages was only the first of many waves to hit our economic shores.
  

My advice was to "go defensive" -- i.e., build cash and buy bear market ETFs that went up when stocks went down.

My low-end target for the S&P 500 (SPX) was 740 based on our earnings-per-share models and a normal earnings recession. That forecast took us back to April/May 1997 valuations -- i.e., wiping out 12 years of stock gains.

My forecast was not popular, but it was spot on.

What happened, of course, is the financial world imploded. And, yes, we did hit 741 on the S&P 500 on Monday.

This year, I was waiting to get my forecast out until we had some idea of the Obama strategy for economic recovery and stimulus.

And now, unfortunately, the Obama administration has failed to make the hard decisions that could have cured the actual disease in the financial markets. Instead they are providing the equivalent of aspirin for a major organ failure. And the results of this misdiagnosis will extend the period of economic recovery for years.

Are We at a Bottom?

Now that the S&P 500 has revisited its November lows -- something I anticipated and have written about often during the past months -- people want to know whether we have reached the bottom?