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Economic Forecasts

5 Things That Could Whack the Market

What are the odds the market will be roiled by a recession, credit crunch, inflation, falling dollar and Democratic victory in 2008?

Recession

A ripple effect from housing and credit problems could hit consumer spending and trigger an extended period of negative economic growth. That would squeeze corporate earnings and hit the stock market.

Odds: 25%

Credit

Banks and other large holders of mortgage-backed securities and other derivatives are suffering huge losses from the tumbling values of their investments. Weak bank balance sheets and uncertainty could cause a credit crunch.

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Odds: 20%

Inflation

Falling home prices are deflationary, but the seeds of a rise in inflation rates may have been sown by a falling dollar and surging oil and food prices. Higher inflation would spook the bond markets and likely prevent the Fed from continuing to cut short-term interest rates.

Odds: 20%

The dollar

A slumping greenback could prompt foreign investors to dump their U.S. dollar-based assets, driving down stock and bond prices. A weak dollar could also make it harder for the U.S. to fund its deficits, driving up interest rates.

Odds: 15%

Politics

A Democratic victory in the 2008 presidential election combined with a Democratic-controlled Congress is a sure recipe for tax increases in '09. The prospect of higher taxes on dividends and long-term capital gains could roil the stock market.

Odds: 25%

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