As we look ahead to 2008, I thought it would be worthwhile to share some of my thinking for entertainment purposes of what I think will happen in 2008. As the year goes on, I will review how I did on these predictions with both subscribers and in this public blog.
1. Markets will produce results ahead of their historic average as liquidity provided by the Fed works into the system. In addition, bond yields are not far from historic lows and will be supportive for higher stock prices. I feel that valuations in the market are at reasonable levels and in fact are very cheap in certain parts of the market.
2. Financials will stage a comeback and be one of the best performing sectors during the year. In addition, asset management firms which have seen recent share price declines will be market leaders in 2008.
3. Valuations will matter. In 2007, we saw many names with very high P/E perform exceptionally well but in 2008 I think we will see a more traditional market environment where inexpensive stocks do best.
4. The Fed will continue to cut rates to be within 25 basis points of 3.5% by the end of the year (100 basis points below current levels) with the actions all coming at the start of the year to keep a recession at bay (although a slowdown is likely in Q4 07 and Q1 08). The economy will begin to pick up steam in the later half of the year.
5. U.S. stocks will outperform international stocks on a dollar basis. For the first time in several years, I anticipate that U.S. stocks will outperform international (especially European) securities in part due to currency moves and in part due to a slight slowdown that I expect to occur in European markets. I think emerging market stocks will hold up well for the year due to all of the liquidity from the U.S. Fed, however, I would not be surprised to see a selloff in some of the frothier markets such as China and India.
6. Consumer stocks will start off rocky but end up with sizeable gains for the year as consumers become more confident.
7. Housing will reach a bottom near mid-year. This is one of the harder areas to predict but I believe that housing will finally reach its bottom in mid-year and prices will stabilize. Housing is a notoriously slow moving market so I do not anticipate a rise in prices but rather a stabilization as low interest rates helps to even out supply and demand. I would expect some consolidation within the industry just prior to the bottoming of the market.
8. Commodity prices will continue to be volatile throughout the year as geopolitical risks are not going away and speculation (both bullish and bearish) will continue to create rapidly moving markets.
I feel that my portfolio is well positioned if the above events were to happen and will benefit especially in the asset management area from the positive market environment that I expect in 2008.