What’s ahead in 2010?

If all the portents are correct, the year ahead should be much more stable than the chaotic one we’ve just left behind. Having said that, we all know there will be unforeseen events that will disrupt any predictions made today. But assuming none of these fall into the “disaster” category (e.g. another 9/11, one or more major bank failures on the Lehman Brothers scale, etc.) I expect we’ll all be able to sleep a little more comfortably at night. Based on the trends that seem to be materializing, here is how I expect 2010 to unfold.

Stock market momentum will slow. The rebound from the lows of March 2009 was far more robust than most people expected. That cannot and will not continue. The markets need time to consolidate so the early part of the year may be more or less flat. We could see a lift in the spring when first-quarter earnings come out because they will look so strong compared to a year ago, but that may only be temporary. I don’t expect a major new upward move until the fall and only then if we see clear signs of continued economic growth in 2011.

The S&P/TSX Composite Index ended 2009 at 11,746.11. I expect to see growth of about 10 per cent to 15 per cent in 2010, so my year-end target is in the range of 12,900 to 13,500. That’s still well below the all-time high we reached in June 2008 and I don’t expect we’ll be there again until the second half of 2011 at the earliest.

The S&P 500 ended the year at 1,115.10. I think the TSX will outperform Wall Street again so my year-end forecast is in the range of 1,200 to 1,250.

Interest rates will rise — slowly. We will see higher interest rates in 2010 — that’s almost inevitable considering they are close to zero now. But they may not move up as quickly as many people expect. It would not surprise me to see the Bank of Canada’s target overnight rate at 1 per cent or even less at year-end. There are three reasons for this theory.

1. Low inflation. The Bank has a 2 per cent target rate for inflation and Governor Mark Carney has said he intends to work towards that level. But that will take time. The November numbers from Statistics Canada showed the annual inflation rate is currently only 1 per cent and there is still a lot of slack in the economy. Higher interest rates are one of the Bank’s major tools in fighting inflation, but right now there is no inflation to fight.

2. The loonie. High interest rates in relation to those in the U.S. increase the attractiveness of our dollar to foreign investors. Mr. Carney, Prime Minister Harper, and Finance Minister Flaherty have all expressed apprehension about the impact of a high loonie on Canada’s economic growth. The corollary of those concerns will be a reluctance to push rates dramatically higher, especially if inflation remains low.

3. Consumer credit risk. One of Mr. Carney’s main themes lately has been to warn Canadians about the dangers of taking on too much credit, particularly when it comes to housing. Low rates make mortgages affordable now but some people may find themselves in financial trouble when they move higher. The last thing the Bank of Canada or the government wants to see is a housing collapse along the lines of the U.S. experience.

Bonds will underperform. We’ve enjoyed two good years in the bond markets, although they were very different. Government bonds were the stars of 2008 as people fled to the safety of U.S. Treasuries and Government of Canada bonds despite their low rates.

Part of the fallout from this rush to safety was the opening of historically high spreads between government and corporate issues. That situation was unsustainable which is why I reiterated my buy call on the Phillips, Hager & North Total Return Bond Fund last January. It gained 11.24 per cent in 2009, which is very high for a bond fund.

I believe it will be a different story in 2010. The spreads between government issues and high-grade corporate bonds have narrowed considerably and concerns about higher interest rates will make investors wary. The best bond bets in 2010 look like high-yield issues and real return bonds.

Commodity prices will rise, but selectively. As the global economy strengthens, some commodity prices will move higher but it won’t be an across-the-board phenomenon. Oil will probably test the US$90 mark during the year but I don’t expect it to go much higher unless a natural disaster or a massive terrorist attack disrupts production for an extended period. Natural gas will continue to be constrained by an overabundance of supply — it seems that every time we turn around, we’re hearing about major new gas finds. The problem is that too many North Americans don’t have access to this clean-burning fuel.

I predicted a couple of months ago that gold would hit US$1,200 an ounce in 2010. That’s already happened and since then the price has dropped back to the US$1,100 range. I don’t see any reason why gold should move much beyond US$1,200 in 2010. A trading range of US$1,000 to US$1,200 seems more likely.

The loonie will reach parity. Since I expect the price of oil to move higher in 2010, it follows that I anticipate a higher loonie as well. As I have commented in the past, our dollar has become a petro-currency whether we like it or not. The Bank of Canada and the government will do whatever they can to talk the currency down but massive intervention in the markets to depress the loonie’s value is unrealistic. We could see our dollar as high as US$1.05 during the year but parity is a more sustainable target.

So there you have it: my fearless forecasts for 2010. Stick around for my first column in 2011 when I’ll report on how well — or badly — I fared.

Gordon Pape’s latest book is The Ultimate TFSA Guide: Strategies for Building a Tax-Free Fortune, published by Penguin Group Canada. It can be ordered at 28 per cent off the suggested retail price here.

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