December 8, 2009 - Notice the headline is a question, not a statement. If I knew exactly what would happen in 2010, I wouldn't write anymore. I'd just invest accordingly. But I don't know (nor does anyone) what will happen exactly in the next 12 months. However, there are economic signals that can give all of us some good guesses. Here are mine.

Banks will lend to businesses, make jumbo mortgages, increase lending in general. The President sat with the largest banks this week and basically said: Lend more to businesses or suffer the consequences. He didn't have to spell out the meaning of consequences. Banks are highly regulated now and know the power of the government's mandates. With FDIC insurance as the main differentiator from other financial institutions, banks have to dance to the government's tune or regulators will find a permanent home at the bank and "discover" all kinds of problems as well as make them. The administration wants banks to lend more money. They will. That will mean more investment in capital equipment, in information technology, in people. Banks will also lend on jumbo mortgages in 2010, giving that segment of the market a much needed boost. That means better times for housing stocks.

Stocks will not move very much, up or down. With a major rally just finished (since the March lows, the Dow Jones Industrial Average is up over 60%), stocks have already discounted much of the good news. It will take a noticable increase in revenues and profits for most stocks to continue higher. Many companies have cut costs to minimum levels. Unless sales improve they'll have a hard time growing earnings. Stocks that see higher sales will show markedly better earnings until new costs such as more employees or more equipment are incurred. Most likely candidates for higher sales: housing, restaurants, retail, computers, software, advertising.

Mortgage defaults in the commercial sector will go higher. As businesses have trimmed their workforces, they're now vacating buildings and plants. Without better demand for products or services, most companies have excess capacity. They can't rent it out, and they can't meet the mortgage. Look for high foreclosure rates and more losses at banks that own the paper. If you own banks, check their loan loss reserve levels. More is better.

The economy will continue to improve, though at a modest pace. Don't expect a large rebound in any sector. Consumers are still shell shocked by the events of the last 18 months to open their wallets, their savings accounts, and get new lines of credit (if available) to buy the newest car, the biggest house or latest bling. The days of ostentatious spending are dormant for now. They'll be back but not for many years. Consumers will continue to be thrifty but indulge in a few exceptions. A good test will be Christmas shopping numbers. They're shaping up better than last year. The question is by how much. With the fear of losing a job receding, most consumers should feel comfortable in spending more but how much more? Holiday sales is a good number to watch for potential spending in the new year.

The surprise that might happen: Interest rates spike quickly, sending adjustable rate mortgages to levels that more homes are in default. Businesses won't borrow because rates are too high to make economic sense. The economic recovery stalls before it gains traction. Unemployment goes higher. The recession worsens.

The Fed will do everything it can to drag its heels on raising rates but if prices move up too quickly, it will have no choice. This is the worst case scenario that everyone is working to avoid.

As I stated at the opening, no one can tell what the future holds. But these scenarios, based on current economic data, seem highly likely. The stock market doesn't have any good reasons to move higher unless sales show marked improvement. Nor does it have any good reason to move lower since many companies are meeting or beating their earnings expectations. Investors believe better days lie ahead, having pushed stock prices higher in anticipation. Unless there's more meaningful good news, don't expect them to keep buying with as much enthusiasm in 2010.

- Ted Allrich