My Forecast for 2008
Don't count on a recession but look for stocks to have a good year and Democrats to take control of the White House.
Nobody knows for sure what will happen in the coming year, but the demand for predictions is so high that I will throw mine into the ring. Let's start with the economy. There will be no recession in '08. The economy will start the year slowly, with the gross domestic product growing less than 1% in the first quarter (after a similar increase in the lastquarter of 2007). By the middle of the year, the economy should begin picking up steam; it should grow 2% to 3% in the second half.
By June, the subprime-mortgage disaster will ease. Although delinquencies will have risen, the foreclosure crisis will ebb as most lenders make deals with beleaguered mortgage holders. As the housing crisis eases, the flow of credit will return to more normal levels and lending will revive. However, home prices will keep falling or remain stagnant at best. Prices of real estate just got too high during the last boom, and down cycles for housing last much longer than they do for the stock market.
The slow economy will keep inflation under wraps, but energy prices are likely to stay high. Overall inflation will run 2% to 3% in 2008, and core inflation (that is, excluding certain volatile items, such as food and energy) will remain a bit more than 2%, the Federal Reserve's limit for "acceptable" price increases.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Interest rates and the dollar. Rate movements will closely follow the pattern of economic growth. The Fed is likely to lower short-term rates several more times in early 2008 and bring its key federal funds rate down to about 3.5% by midyear. But the pickup in economic activity by the second half of the year will cause the Fed to raise rates again. Notwithstanding what the Fed does, I don't believe we will see yields on ten-year Treasury notes below 3.5%, and these rates are likely to rise to well beyond 4% in the second half of 2008.
I also think that the dollar will reach its low sometime during the first quarter of 2008 and then start rising. The dollar is far below its "purchasing power parity" level (a measure of the greenback's buying power), which is a good guide to long-term exchange rates. A stronger economy and rising interest rates will also be good for the dollar.
Prospects for stocks. Shares should have a good year, returning 8% to 10%. Stocks will rise as economic growth picks up in the year's second half and head winds from the credit crisis ease. Earnings will take a hit in the first quarter of 2008, but profits will begin to recover by the second quarter. Stocks are reasonably valued, even when priced against poor earnings. Once earnings increase, stock returns will be considerably better.
Financial stocks, by far the worst-performing sector in 2007, could well be the best in 2008. Foreign stocks, which I have long recommended, will continue to do well. But if the dollar rises, foreign stocks won't benefit from currency gains and might lag U.S. stocks. As the U.S. economy slows, Chinese stocks will continue to cool -- plus, they're likely to suffer a hangover after the Beijing Olympics. Still, investors should maintain a diversified portfolio, with about 40% of their stocks allocated to foreign markets.
Political outlook. Of course, there's the presidential election in November. I predict that Hillary Clinton will take the Democratic nomination and Rudy Giuliani the Republican nod. How about Bill Richardson as Clinton's choice of running mate and John McCain as Giuliani's?
The race will be a dogfight. I say the Democrats will win the White House and retain control of the House and Senate. That will cause the market to flutter a bit, as investors fret about the heightened prospects for higher taxes. But strengthening U.S. and global economies will keep the market on track for still another winning year.
Columnist Jeremy J. Siegel is a professor at the University of Pennsylvania's Wharton School and the author of Stocks for the Long Run and The Future for Investors.
-
Use An iPhone? You May Be Hearing From A Class-Action Lawsuit Group
A handful of suits against the iPhone maker seek to crack down on everything from app store purchases to messaging.
By Keerthi Vedantam Published
-
Capital One/Discover: What's In Their Wallet For You?
Push back on Capital One's planned merger with Discover is growing with one group of consumer advocates calling for a public hearing.
By Keerthi Vedantam Published
-
The Robots Are Coming... But Not For a While
The Kiplinger Letter There’s excitement in the tech sector over the potential of humanoid robots, but widespread adoption is likely to be years away.
By John Miley Published
-
Farmers Face Another Tough Year As Costs Continue to Climb: The Kiplinger Letter
The Kiplinger Letter Farm income is expected to decline for a second year, while costs continue to up-end farm profitability.
By Matthew Housiaux Published
-
H-1B Work Visa Rules Get a Revamp
The Kiplinger Letter H-1B visas allow employers to hire high-skilled foreign workers. Regulators have finalized new rules for this visa program following last fall's proposal.
By Matthew Housiaux Published
-
Woes Continue for Banking Sector: The Kiplinger Letter
The Kiplinger Letter Regional bank stocks were hammered recently after news of New York Community Bank’s big fourth-quarter loss.
By Rodrigo Sermeño Published
-
Are College Athletes Employees of Their Schools?: The Kiplinger Letter
The Kiplinger Letter A recent ruling has ramifications for labor relations and the unionization of student athletes.
By Sean Lengell Published
-
Salton Sea Clean Energy and Lithium Project Gets Approval: The Kiplinger Letter
The Kiplinger Letter California's Salton Sea is due to see the construction of a new lithium extraction and geothermal clean energy power plant.
By Matthew Housiaux Published
-
More Woes for Anheuser-Busch as a Strike Looms: The Kiplinger Letter
The Kiplinger Letter Drinkers of Anheuser-Busch beers may want to stock up soon. A looming strike threatens to shutter its U.S. breweries later this month.
By Sean Lengell Published
-
The Auto Industry Outlook for 2024
The Kiplinger Letter Here's what to expect in the auto industry this year. If you’re in the market for a car it won’t be quite as daunting as it was during the pandemic and after.
By David Payne Published