Some Predictions for the Year of the Bear

by: Roger Nusbaum

There were quite a few markets around the world that did not have a great 2007. Ireland was down 25%. That is a significant haircut and I have to think the vast majority of the selling is done. If you believe that stock markets move ahead of the economy, there could be more economic issues in Ireland that surface to be sure, but I would be surprised if there is a lot more downside for stocks there. For perspective, though, I started with a 3% allocation to Ireland that is now smaller--point being I have moderate exposure that did not crucify me.

Sweden is an interesting one. The market there was down about 8%, but most of that can be attributed to a 40% (in dollar terms) decline in Ericsson (NASDAQ:ERIC). I have one Swedish stock that, although way off its high, was up about 20% this year (that includes a small tailwind from SEK strength).

The FTSE 100 was up about the same as the S&P 500 in 2007. I disclosed recently cutting back my exposure here as the economy looks like it could be rolling over, but stocks have not started to do so.

The New Zealand market was up 20% in 2006 and flat in 2007, but all of the structural problems notwithstanding, the kiwi was up 10% against the dollar this year. My hunch is that New Zealand index has a good year, but for now I am not considering exposure for clients.

The S&P 500 was up 3.5% in 2007, add in the dividend and we get 5.2% total. I thought we would be down a little this year, between 1350 and 1375. Going below consensus was the right idea but the magnitude was off considerably.

I think this year will be below consensus again, and I suspect we will be down for the year as a function of normal market cycles. We have not had a down year or a bear market in a very long time. As noted frequently, I do believe a bear market has started. If correct it would be unlikely that it would end and then bounce back all the way by next December 31.

As noted many times, the rolling over in the market of the last couple of months is how bear markets start. We are only down a little, and I am still very long after making a few defensive tweaks.

I am not sure I am in the big-rally-in-gold camp, for 2008 anyway. Gold is up 30% over the last year and 60% in the last two. Taking a rest for a while seems plausible, but I own gold for clients and would welcome another 30% lift this year. If a flat or down year for gold pans out, it could make owning soft or agricultural commodities all the more important.

I thought the yield curve would have started to steepen meaningfully in 2007 but that did not happen. I guess I'll stick with that idea for 2008. It seems like the Fed will do some more cutting. Hopefully the middle of the curve and further out will move up in yield. This would make lending money more profitable and so the financials more attractive. Generally speaking it is pretty tough for an index to go somewhere without its largest sector.

So this post evolved into a 2008 prediction of sorts. A diversified portfolio is a mix of things that are doing what you expect and things that are not. A list of predictions, like last year and the year before, are a mix of things that are right and things that are wrong. Of course none of it matters, or at least it shouldn't matter. If you are not a big risk taker you might tilt to certain outcomes but not bet the ranch. You know from reading this site that I favor moderation at every turn, and never lose sight of the things that could go wrong.