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%

He also suggested that investors who want to avoid potential turmoil in the first six months should "remain defensive," with a focus on consumer staples and health care. Dickson and Ablin echoed those sector recommendations.

Collins of Fountain Hill likes telecom because "in an environment where we're moving toward recession, it holds up fairly well." He likes the metals, and he sees gold hitting $1,050 an ounce. Also, he said agricultural plays could be good. "There's a lot of momentum money, and short-term there could be a pullback, but with global trends I think that's still a place to have some exposure," he said.

Some experts even made stock picks for the first six months of 2008.

Levkovich likes Intel ( INTC) because he sees less excess capacity and simultaneous pricing power returning to the industry; Marriott International ( MAR) because of "limited capacity growth ... which means few rooms are going up; and Charles Schwab ( SCHW) because the company "continues to gather assets" and doesn't have problems with weakness due to lack of merger-and-acquisition activity.

(Citigroup has an investment banking and non-investment banking relationship with all three companies. Also, a member of Levkovich's household is long Intel.)

Sparks prefers ( PCLN) and ( AMZN) because they "have shown good financial results, they've held up against the recent market turmoil, and yet not to the point where the growth trend is over."

He also names SunPower ( SPW) and First Solar ( FSLR), because he believes there will be opportunity in alternative energy as long as oil prices remain high. Sparks doesn't own any of those stocks, but Schaeffer's or its employees may own shares in them. Schaeffer's recently recommended long positions or call options in each of those stocks to its subscribers.

Pavlik mentions technology names Apple ( AAPL), Hewlett-Packard ( HPQ), IBM ( IBM) and Cisco Systems ( CSCO); Aetna ( AET), Medco Health Solutions ( MHS) and Express Scripts ( ESRX) in health care; and General Dynamics ( GD), United Technologies ( UTX) and Honeywell International ( HON) on the industrial side. (Pavlik's firm has holdings in all those names.)

Dickson of D.A. Davidson mentions UnitedHealth Group ( UNH) and Teva Pharmaceuticals ( TEVA) on the health care side, while preferring Procter & Gamble ( PG) for international consumer staples. Dickson has no personal conflicts, and his firm has no investment banking ties to any of these stocks.

Blue-Chip Outlook
Name Firm Dow prediction (June 30, 2008) S&P 500 prediction (June 30, 2008)
Tobias Levkovich Citigroup 15,500 1725
Richard Sparks Schaeffer's Investment Research 14,600 1625
Robert Pavlik Oaktree Asset Management 13,800 1525
Fred Dickson D.A. Davidson 13,000 1400
Jack Ablin Harris Private Bank 12,360 1365

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