Here's hoping that next year is much better to all of us. Above all, I hope that Obama does a fantastic job. Here's what I think will happen to the economy and the markets:
Inflation: headline inflation has gone down, but core inflation hasn't; once oil prices bottom (which I think is happening), all measures of inflation will head higher; I don't see a hyperinflation yet, but I do see inflation that is significantly higher than what is priced into the bond market. The main driver of higher inflation will be the Fed's inability to withdraw its massive liquidity injections in a timely fashion; they will prefer to err on the side of inflation rather than risk a weaker economy.
Growth: the economy is going to recover sooner than the market expects, with the bottom in activity coming before mid-2009; the recovery will be sub-par however, due to the drag of increased fiscal spending and slowly rising inflation.
Housing: the bottom in construction activity has essentially arrived; whether construction drops another 10% or not is at this point immaterial; housing prices are rapidly approaching a bottom, which should come well before June '09; mortgage rates are now low enough to make a huge difference.
Interest rates: Treasury yields are essentially at their lows and will be significantly higher by the end of next year. TIPS yields will hold steady or fall as nominal yields rise.
Spreads: Spreads have seen their highs and will continue to narrow.
Equities: We have seen the lows in equity prices; equity prices will lag other risk asset prices, but they will be significantly higher by the end of next year.
Commodities: Prices are essentially at their lows; whether they drop another 10% is immaterial; prices are beginning a bottoming process; oil prices are unlikely to drop below $35; commodities may take awhile to move higher, but they will be higher within 2 years.
Dollar: The dollar is unlikely to make further gains against most major currencies, given the Fed's hyper-easy stance, and is likely to fall against emerging market currencies as commodity prices rise.