What’s in store for investors?

I need to preface my forecasts for 2005 with a warning: expect the unexpected. We have been rocked by one shock after another since the turn of the century. It would be astonishing (but also welcome) if 2005 turned out to be different. These predictions are based on the trends and patterns that appear to be in control as we enter the New Year. But be prepared to shift gears at a moment’s notice if the situation calls for it.

Lower stock profits. My feeling is that the bull market that began in the late fall of 2002 is losing momentum. Although we saw some decent advances in 2004, they were much lower than the gains recorded in 2003. I believe we will see that deceleration continue in 2005. A market correction is coming. It may not happen until 2006 or 2007, but I feel that the major North American indexes will only record single-digit advances this year.

An income trust correction. Last year at this time, I was bullish about income trusts. This year, I am bearish. I feel the sector is overheated and that a correction, perhaps on the order of 10 per cent to 15 per cent, is in the cards sometime in 2005.

I expect it will happen lar rather than sooner, however. The pause in Canadian interest rate increases and the passage by the Ontario government of a law to shield trust investors from liability actions should keep the market buoyant for a few months. But the reality is that many trusts look expensive right now. They can’t keep rising forever.

Bonds may surprise. The death of the bull market in bonds has been predicted by economists for the past four years. We’re still waiting. Bonds delivered decent returns in 2004, with the Scotia Capital Universe Bond Index rising 7.15 per cent. I think we’ll see about the same in ’05. The pace of interest rate increases should slow in the U.S. by mid-year and in Canada it may be some months before our central banks tightens again.

No joy for GIC investors. At year-end, Royal Bank was paying the magnificent sum of 2.6 per cent on five-year non-redeemable GICs. Who can live on that? We may see some slight upward movement in 2005 but if the five-year rate tops 3.5 per cent before next New Year’s Day, I’ll be surprised. Money market investors can also look forward to another year of paltry returns. Seek out other options.

A higher loonie. As usual, economists disagree on where the loonie is going. Some predictions run as high as US90c by year-end. Others have the loonie settling into a range of as low as US78c to US86c. Since I believe Washington will continue to let the American dollar slide, I’m in the higher loonie camp. We could reach US87c to US88c this year.

More expensive gold. If the U.S. dollar keeps sinking, gold should keep rising. But it does not look like we’re going to see the big break-out above US$500 that many gold bugs have been predicting.

So there you have them. My fearless forecasts for 2005. Check back a year from now and we’ll see how I did.