Market summary: Buoyed by a very strong economy, U.S. stocks are moving ahead. It turns out that the...
01/03/2008 12:00 am EST
January 3, 2008
This is the time when gurus, pundits, and various wannabes make their fearless predictions for the year ahead. It's like baseball's spring training: hopes are high, and every team thinks it can win the World Series.
In future columns we'll tell you what some of the top advisers on MoneyShow.com see in the year ahead. This week is my turn. So, here are my Lucky Seven predictions for 2008:
1. US economic growth will slow, but we'll narrowly avoid a recession. Yes, yes, I've read the same articles you have about subprime mortgages, the housing bust, the credit crunch, and higher oil prices. But it still doesn't add up to a recession, defined as two consecutive quarters of declining gross domestic product (GDP).
No doubt, housing is in bad shape, especially in once-overheated markets like Florida, Nevada, and parts of California, which are already taking big hits. And foreclosures will mount in the coming year as more adjustable "teaser" loans reset to higher rates. But housing accounts for only 6% of GDP and the end of the housing bubble will probably cut about a percentage point or so from GDP growth.
Meanwhile, as I wrote here, employment remains solid, and affluent consumers have plenty of money to spend. That and booming exports should help keep the economy at least treading water for a while. Which brings us to my next prediction.
2. The Fed will continue to cut rates. Investors are counting on at least one or two more quarter-point cuts in the federal funds rates, and they won't be disappointed. Minutes of previous Federal Open Market Committee meetings reveal growing concern among the Fed governors about economic weakness. That's actually good news-it shows Ben Bernanke and Co. will do what it takes to stave off recession, or to minimize its impact.
The Fed chairman has gotten lots of criticism from Wall Street crybabies who think he's not helping their long positions and from inflation hawks who believe he's bailing out deadbeats and miscreants. I think they're both wrong: Bernanke faces a much tougher environment than his predecessor did-a slowing economy, a weaker dollar, and rising headline inflation. It's a difficult balancing act, but in the long run I think his policy of steady rate cuts and providing liquidity when needed will succeed.
3. The credit crunch will ease, maybe even after the first quarter. As banks gradually clean up the mess made by the latest generation of Wall Street's geniuses and put some of those bad loans where they belong-on their balance sheets-credit will become more available throughout the economy. As time passes and all the mortgage resets don't lead to Armageddon, investors and business owners will be ready to take some legitimate risks again. Lower interest rates won't hurt, either.
4. US stocks will hit new highs in 2008. I'm not predicting they'll go to the moon, but when the economy doesn't tank, investors may shake off their grim mood and realize US stocks are pretty reasonably priced. Financial companies and homebuilders have been racking up big earnings declines, but other sectors (like technology) are showing strong earnings growth. The large blue-chip multinationals, helped by a weak dollar, should continue to profit from strong overseas economies, and they will outperform smaller, domestically oriented companies for at least the next couple of years.
5. The US dollar should rebound in 2008. I don't expect a return to the days when the greenback was a passport to bargains around the world. But I think the dollar got way oversold late last year, and I expect it to stabilize, particularly as other economies slow.
The euro may hold up well along with the Continent's economy, but the British pound may head much lower: the UK's economy has many of the problems the US has, but nowhere near as many of our strengths. Expect to hear fewer British accents in US shopping malls next Christmas, and a vacation in England or Scotland may once again be affordable.
6. Oil will go over $100 a barrel, then sell off. We predicted much higher oil prices here and here, when we actually called for $100 oil. Now that it's happened, I think oil prices will move a bit higher. But without a big political shock in the Middle East, weaker economies in the US and elsewhere will take the wind out of crude's sails for a while. In the long run, though, tight supply and growing demand for oil from all over the world will ultimately drive prices back up.
7. The US presidential election may cause stock market weakness later in the year. The pundits all say the US electorate is yearning for change, which should make the current presidential election one of the more interesting in a long time. The "front-loaded" nature of the campaign-30 states will have primaries or caucuses by early February-should theoretically sew it up early, but don't count on it: especially on the Republican side, where there's no clear front runner, candidates could be slugging it out until well into the spring.
All the major Democratic candidates oppose extending the Bush tax cuts beyond 2010, while most of the Republican candidates favor making those cuts permanent. The Democrats also favor more compulsory health care coverage plans than Republicans do, while Republicans by and large want tighter immigration laws.
There appears to be growing uneasiness in the country about free trade and other aspects of what has been called "globalization." Listen carefully to the candidates' rhetoric. If they adopt strong populist messages (like former Senator John Edwards has done) and it resonates with voters, then higher taxes and trade and immigration restrictions may be in the cards. That would not be good for the markets.
There you have it-my seven predictions for 2008. Later in the year, we'll update you on how we did, but in the meantime have a happy, healthy, and prosperous new year.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and not necessarily the views of InterShow.
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