Stocks: Five Trends to Watch in 2009 (2)

Government Stimulus

Another trend to watch is what form the government stimulus package takes and how quickly it works its way through the economy. There's been talk of a stimulus as big as $1 trillion but clearly the focus will be using the money in a way that gets the biggest bang for the buck.

The best results will come from "anything that allows the private sector to be more efficient and more productive," says Laufenberg at Ameriprise. That would include a large-scale effort to computerize medical records and wire schools and libraries for Internet access. And if the Obama Administration wants to preserve jobs, the answer isn't to bail out troubled companies since part of the package is likely to be requiring downsizing and job cuts farther in the future, he says.

Spending on public infrastructure projects that many states say are already in the planning stages would produce results more quickly than tax cuts, and would also be more likely to boost tax revenue over the long term than cutting taxes would, Laufenberg says.

Others, like Herrmann at Waddell & Reed, argue that tax cuts are quicker to stimulate the economy as long as they are permanent, not temporary. He believes a reduction in payroll taxes will come first and will result in higher consumer spending, which would benefit discount retailers such as Wal-Mart (WMT) more so than more expensive ones. A tax cut to corporations that accelerates the depreciation schedule on plants, property, and equipment could jump-start capital spending on technology and industrial machinery, he says.

If the stimulus package helps the economy recover faster than people currently expect, that would cause energy prices and stocks to rally, which argues for increased bets on energy and natural resources mutual funds, says Herrmann.

Laufenberg says that a sustainable expansion will depend not only on government stimulus but on some adjustment in prices, too. Lower interest rates and narrowing credit spreads are part of that process. While the market generally anticipates recovery about six months in advance, there will continue to be a lot of volatility around the economy, especially with a big drop in fourth-quarter gross domestic product and higher unemployment still to come, he says.

There will be plenty of opportunity to play sectors in the longer term, but in the meantime, Laufenberg recommends an index fund that tracks the broader market, as represented by the Standard & Poor's 500-stock index. "I don't know if you'll make money on that trade in the next week or month, but I can tell you that you will make money on that trade in the next two to three years," he says.
Continued Flight to Safety

The internal conflict for investors whose brains tell them it's time to take advantage of low valuations and start buying equities but whose emotions resist any type of risk is likely to continue in 2009, says John Marshall, co-founding partner of the Resource Group, a wealth management firm in Glendale, Calif.

For those investors, annuities could be the perfect way to get through the volatile times ahead, he says. Annuities allow you to take risk in sub-accounts through a broad menu of mutual funds while having your principal guaranteed by an insurance company in return for a fee. "I liken it to an automobile where it's going to cost you a small premium to put in extra safety features," says Marshall. "An annuity in some ways is like putting air bags on your portfolio. Even if you get into a fender-bender, you may not need the air bags, but it may be worth that expense in case you get into a major collision later on."