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There Is a Silver Lining
01/22/2008 12:00 am EST
Tom Slee, contributor to Internet Wealth Builder, says all the gloom and doom may be way overblown and the economy and markets may bounce back in 2008.
As you know, we are off to a bad start [to 2008]. In addition to the normal uncertainties, investors are grappling with three almost entirely new problems.
First, global economies are no longer responding to the usual stimulants. Central bank rate cuts and infusions of cash have so far had minimal impact on a serious credit crunch. Institutions are reluctant to lend because “subprime” has undermined their confidence.
Second, European and emerging countries seem unable to come to terms with a weak US dollar and may not pick up the slack as North American business activity slows.
Last, but not least, the American economy is no longer the preeminent global growth engine. Indeed, one leading economist thinks that it has become the caboose, at least for a while. All these factors are going to play out in 2008.
My feeling is that the weakening greenback poses the greatest threat to our markets this year. The US dollar’s sharp decline is now starting to bite. Down 40% against the euro over the past seven years, it’s being blamed for labor strikes in the Middle East, lost jobs in Europe, and the end of an era of globe-trotting rich Americans. The decline is also spurring US inflation as imports, especially energy, become more expensive.
The credit squeeze is likely to be less of a problem mainly because it’s solvable. Central bankers are already banging heads and forcing institutions to play ball. At the same time, foreign investors are injecting new capital into Wall Street’s beleaguered banking system. Warren Buffett’s new Berkshire Hathaway Assurance Corp. has started guaranteeing bond issues. A floor is being established.
What does it all mean for small investors in 2008? Well, at the risk of seeming shell-shocked from last year’s market roller coaster, I think that the outlook is promising.
Let’s start with the US economy, which according to many pundits is already in or tottering on the edge of a recession. Certainly growth has been slowing. The consensus is that US GDP growth will be approximately 1.2% during this present quarter.
My feeling, however, is that there will be no recession, primarily because the Federal Reserve is almost bound to step in and slash interest rates if the numbers sour. We could see US central interest rates as low as 3.5% or even 3% regardless of inflation and a shrinking greenback. The people in Washington, DC are not going to sit by and watch the economy tank during a presidential election year.
As to the market, well it’s anybody’s guess during the first six months. I feel that we should brace for volatility and road bumps over the next quarter or so and then sideways movement followed by an upward trend as fundamentals take hold.
Take full advantage of the expected volatility in 2008. In particular, keep an eye open for dividend-paying blue chips that have been depressed by sharp corrections. They often offer unusual bargains.
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