by GREGORY ZUCKERMAN
A year ago, investors were dealing with heavy losses from the most brutal stock-market selloffs in years. The last thing they expected was a ferocious bull market. And yet, shares soon began to soar -- climbing more than 50%.
Last year's unexpected stock rebound -- and the sudden selloff last week -- should remind investors to be on the lookout for the next surprise. That's because big profits come in being early to the next trend, and in preparing for the next downturn.
"If you don't leave yourself open to surprises, when they occur you probably won't respond correctly," says Mike O'Rourke, chief market strategist at institutional trader BTIG LLC.
It's a simple rule of thumb: Buy before the good news; sell before the bad. The tricky part comes, of course, from guessing where the news might break to begin with.
Here are some places to watch:
Energy Boost: Many analysts expect energy prices to keep climbing, as demand from China pushes oil prices higher.
But Mr. O'Rourke says crude prices could actually drop below $50 a barrel this year, helping to fuel an economic recovery. He argues that as China applies the brakes on its growth, and is no longer focused on filling its strategic petroleum reserve, prices could fall.
"Despite this record Chinese demand in 2009, crude has been unable to sustainably move above the levels achieved in the spring" of 2009, Mr. O'Rourke says. "If this demand wanes, it could have a real problem" for energy prices.
Meanwhile, more energy supply is on the way, which also could pressure prices. There have been major oil discoveries in recent years, including in the Gulf of Mexico and off the coast of Brazil. And the U.S. Geological Service said last month that Venezuela's Orinoco Belt held far greater oil reserves than had been believed.
Heady Growth: Most economists predict subpar growth in the U.S. and around the globe in 2010. Consumers are dealing with too much debt, help from government spending will peter out, and businesses aren't spending much.
But if the recovery conforms to historic patterns after major downturns, it could be surprisingly strong.
Some recent data have been encouraging, with manufacturing activity at its highest point since the summer of 2004. An index compiled by the Institute for Supply Management rose to 58.4 in January from less than 55 in December. A reading above 50 indicates expansion. A recent survey showed banks have stopped making it tougher for consumers and businesses to borrow, another hopeful sign.
"The more I look at the data, the more this looks like a typical recovery," says Norbert J. Ore, chairman of the ISM survey committee.
Robust growth may have to await a rebound in employment. But the improving data are a reminder that the economy just might surprise with its strength.
Japanese Jitters: Investors are concerned about the debt piled up by countries including Spain and Portugal. Some worry that the European Union or others might have to step in to help Greece deal with its debt.
Not as many investors are focused on Japan, though perhaps they should be. Japanese government debt as a percentage of gross domestic product is around 220%, up from 120% in 1998, according to the International Monetary Fund. (In contrast, federal debt is around 85% of the U.S.'s GDP.) Demand has long been strong for Japanese debt, and 10-year bonds yield well below 2%, partly because most of it is held by loyal Japanese citizens. Some observers have been warning about Japan for a decade. The country's debt markets have been steady, but there are indications that domestic buying is slowing.
Any troubles for that market would be more worrisome than woes in some other countries, given the size of Japan's bond market -- about $7.5 trillion -- and the role Japan plays globally.
Another potential worry: the U.K., which has its own debt issues, as well as an economy dominated by the still-troubled financial sector.
Municipal Mess: Municipal bonds have long attracted conservative investors. That might change as the poor health of various states and municipalities comes under scrutiny.
Short-term bonds issued by the state of California yield less than 2%, for example, due to strong demand. But the state is facing a budget deficit of almost $21 billion. As interest expenses rise, they represent a larger chunk of the state's revenue, a worrisome shift. If investors begin to worry about the health of various municipalities, they could push prices lower for various bonds.
Growing Greenback: There are reasons to expect a dollar rebound. Worries about the debt of European nations took hold last week, pulling down the euro and sending skittish investors back to the U.S. dollar. Gold and commodities fell, too.
If U.S. growth proves stronger than expected, the Federal Reserve could signal an interest-rate increase, which also would help the dollar and weigh on shares of gold miners and other commodity producers.
Health-Care Recovers: Health-care stocks were haunted by the specter of President Obama's overhaul plans, though the shares have generally held up. In recent days, they've been hit by downbeat earnings -- such as last week's quarterly results from Pfizer, which helped send the drug maker's share price down 5% over two days.
But some of these shares could see healthy gains. Merck, for example, trades at price/earnings multiples that are below the overall market, yet sports a hefty dividend yield of nearly 4%. If the stock market turns rocky (and it certainly did last week), those dividends will look more attractive.
Health-care companies may have an easier time raising prices if the government can't settle on an overhaul plan, some analysts say.