Siegel's financial market forecasts for 2008
JOSE BAILEN
by Jeremy Siegel, Ph.D.
It's time to dust off the proverbial crystal ball and predict what's
in store for 2008. But before doing so, let's see how I did with last
year's forecast.
Well, I was pleasantly surprised to see that I got quite a lot right
despite missing the subprime crisis. I predicted that the economy was
poised for a mid-cycle slowdown, similar to what we experienced in
1995, the year after the Fed had also raised rates. I predicted GDP
growth would slow in 2007 to 2½% to 3%, and despite the credit crunch,
this estimate was very close. Even if this quarter's GDP grows by a
measly 0.5%, GDP growth for 2007 will be at 2.5%.
For the US stock market, I predicted an 8% gain and greater gains for
foreign markets. December still has two weeks to go, and given the
recent volatility, the market could end the year anywhere. But as of
now, the S&P 500 Index is up 6.3%, while foreign markets have done
significantly better. The foreign developed markets, represented by
the EAFE Index, have returned 15.6% and the emerging markets continue
their torrid pace, chalking up a 42% gain. Last year, I said that if
US stocks climbed less than 8% in 2007 it would be due to $3 a gallon
gasoline and the dollar falling below $1.45 per euro.
Subprime Crisis
Both barriers were breached, but the main reason for this year's stock
market malaise was the credit crisis, which, despite my bearishness on
real estate, I didn't see coming. I've written a fair amount about
this crisis on Yahoo! Finance and downplayed its importance to the
overall economy. Why? I never expected the fear of debt defaults to so
swamp the reality of this problem.
I think the actual number of delinquencies next year will be below
what the market predicts, as investors have overreacted to the
mortgage crisis. When this happens, it could lead to a nice recovery
in financial stocks.
Economic Growth
But the impact of the crisis on the psychology of consumers and
business will leave their mark. I predict that GDP will slow in the
first half of next year to between 1% and 2%, and rise in the second
half, as risk premiums come down and the cost of capital falls.
Overall I expect 1.5% to 2.5% GDP growth in 2008 and I believe the
economy will avoid a recession.
Stocks and Bonds
I think the stock market will have another winning year in 2008. For
every percentage point that stock returns fall below 8% (my
prediction) this year, they should exceed 8% next year (meaning, for
example, if stocks gain 6% this year, they should finish 2008 up 10%).
And I believe that financial stocks, which have plummeted 18% so far
this year, will outperform the S&P 500 Index next year as the credit
crisis fades.
Interest Rates
What does all this mean for interest rates? The Fed cut the Fed funds
rate to 4.25% on December 11, but it will have to do more in the
coming months. I believe that the Fed will get rates down to 3.5%,
before ratcheting them upward in the second half of next year.
Treasuries did well in 2007, as interest rates on top-rated securities
plunged in light of the credit crisis. But as the risk spreads
narrow, money will flow away from government bonds and their interest
rates will rise. I recommend investors cash in governments and top
rated corporate bonds now – you got a nice ride that you won't get
next year.
Oil
There are always events (or "risks" as Wall Street calls them) that
can upend these forecasts and oil is always one of them. Despite some
promising political developments in the Mideast, history has taught me
to be cautious.
If oil surges past $100 a barrel for whatever reason, we will be in
trouble. Three dollar gasoline did not prove to be the tipping point
for the consumer in 2007. But with a weak housing market, I believe
$4 gasoline would do considerable damage to consumers' pocketbooks in
2008. And $4 gasoline would happen if oil rose to $120 a barrel or
higher.
Politics
Of course, next year is a presidential election. Although the
primaries appear up for grabs now with Barack Obama and Mike Huckabee
making a good run, I believe that the Democrats and the Republicans
will nominate front-runners Hillary Clinton and Rudy Giuliani. After
a hard fought battle, Hillary will pull through as the electorate
seems ready for a new party to govern from the White House.
Since I predict the Democrats will also keep the House and Senate, a
Democratic sweep will send some nervous flutters through Wall Street.
But Clinton will prove to be as moderate on economic issues as was her
husband. This means that although taxes will rise on dividends and
capital gains when the current low rates expire in 2010, the increases
will be moderate and Wall Street will be relieved.
I'll wait until after next year's election before offering up another
set of projections for 2009. In the mean time, have a healthy and
prosperous new year!
raylopez99
On Dec 17, 11:02 am, "JOSE BAILEN" <jose.bai...@gmail.com> wrote:
> And I believe that financial stocks, which have plummeted 18% so far
> this year, will outperform the S&P 500 Index next year as the credit
> crisis fades.
>
worth of stock (he must believe in the company, or he's a fool, or
both)
PSEC might well be a buy, since they finance energy.
RL