It's going to be a wild ride in the first half of 2008, at least if market experts have a good read on the situation.
Many are pegging the odds of a recession right around 50% and are expecting volatility to persist; most see the credit crunch and housing weakness continuing to dominate the market's attention during the next six months.
"Take some Dramamine and try to enjoy the ride," said Tobias Levkovich, chief U.S. equity strategist at Citigroup.
Will the first half be better or worse than the second half? There's a split here.
"I think you're going to see a rocky first six months," said Robert Pavlik, chief investment officer at Oaktree Asset Management. "Most of the gains are going to come in the second half" as signs increase that financial stocks are hitting bottom.
Fred Dickson, chief market strategist at D.A. Davidson, agreed. "We're looking at a down six months, basically a bumpy ride as investors continue to reflect and digest what we think will be even more write-offs in the financials related to [collateralized-debt obligations] and mortgages," he said.
However, Dickson does think that there are "positive shock absorbers" in the markets, including "$3 trillion of cash sitting on the sidelines" and the fact that "U.S. markets appear to be on sale to foreign investors" with the recent sideways moves and the dollar so low.
Not everyone sees a downward move during the first half, though.
Richard Sparks, senior equities analyst at Schaeffer's Investment Research, is looking for "pretty much a linear appreciation through the first half" with "the underlying assumption that consumer spending is not likely to take a major hit."
Levkovich believes that the market will increase in the first half, while "the second half will be more challenging. ... You almost don't want volatility to end, because volatility ends with bad bear markets." He said the overriding issue is whether "the credit-crunch conditions just end up being a Wall Street phenomenon, or will it move to Main Street?"
And there are at least some who are very bullish.
"I think the market is going to be very resilient and continue to climb -- there's no other place to put your money," said Neil Hennessy, president and portfolio manager at Hennessy Funds.
Most people think the
Federal Reserve will cut interest rates two or three times in the six-month period in order to stave off recession. But it will have to "tap-dance around land mines," said Greg Collins, CEO of Fountain Hill Investments. Not the least of them is resurgent inflation.
Kevin Giddis, managing director of fixed-income capital markets at Morgan Keegan, agreed. He will be watching the inflation measures, such as the consumer price index, the producer price index and wage growth as the key measures of how the economy and markets will fare.
Opinions still vary widely on how close to resolution the credit crunch will be by the middle of 2008.
"I think we should have a very good handle on the depths of the problems by June 30, absolutely," said Jack Ablin, chief investment officer at Harris Trust. "By June, we'll be through three-quarters of the [mortgage] resets."
But Bill O'Donnell, rate strategist at UBS, isn't convinced. "If you look at the tentacles of the housing market, it took years to distribute the debt" around the world, he said. "I don't see that we're going to wipe our hands clean by the middle of 2008, when it took years to diffuse this risk all over the globe."
Because housing was such a big factor in the credit crisis, many people will be keeping their eyes on how the market is holding up. Experts said they'll be watching measures like the ABX indices (which track investor sentiment about subprime-mortgage debt), the Case-Shiller home-price indices and mortgage-application numbers, among other data, for signs of a return to health in that sector.
In terms of investments, experts advised continuing to avoid financial shares. "There will probably be more investments in the banks and brokers from sovereign funds and large institutional investors, but I don't think that's an indication that individual investors should follow," Pavlik said. "Those funds can afford to take that kind of risk."
| Will the Economy Contract? |
| Name |
Firm |
Recession odds |
| Bill O'Donnell |
UBS |
67% |
| Jack Ablin |
Harris Private Bank |
65% |
| Kevin Giddis |
Morgan Keegan |
60% |
| Greg Collins |
Fountain Hill Investments |
60% |
| Robert Pavlik |
Oaktree Asset Management |
45% |
| Tobias Levkovich |
Citigroup |
40% |
| Fred Dickson |
D.A. Davidson |
40% |
| Richard Sparks |
Schaeffer's Investment Research |
20% |
| Neil Hennessy |
Hennessy Funds |
0% |
Joanna Ossinger
RSS
