Experts predict what the new year will bring
WASHINGTON (Reuters) — Right now, it feels pretty good to be an investor. Stocks, as measured by the Russell 3000 index, are up almost 12 percent this year; most of those gains have come in the last three months.Interest rates are just high enough that folks feel like they are getting reasonable returns on their money market and savings accounts, but not so high that bonds have been hurting.
But — and isn’t there always a but? — the dollar’s in the dungeon, housing and autos are slumping, and the Federal Reserve still seems more than a bit worried about inflation. Not to mention gridlock in Washington, world political instability and — oh, yeah — the oil-price wild card.
It all adds up to a confusing picture going into 2007. Should you buy? Sell? Hide? Here’s what some investment pros and economists are betting will happen next year.
[bul] The soft landing. Many experts, like A.G. Edwards chief economist Gary Thayer, expect a gentle slowing of the economy. Growth will moderate enough to keep inflation in check, but not so much that we have a recession.
Good companies will prevail in this softer economy. “Buy and own the strong companies that have pricing power and dominant industry positions,” A.G. Edwards says in its year-end outlook. “Consider businesses where the product or service they provide is indispensable or there aren’t good substitutes.”
[bul] The presidential cycle. Third years of presidential cycles are usually good for stocks, and they’re even better when there’s a Republican President gridlocked with a Democratic Congress. Since World War II, there have been six years like that, and they’ve averaged 17.6 percent increases for the Standard & Poor’s 500 stock index, according to S&P.
[bul] Big stocks may have their day. “For the first time in years, corporate giants like American Express, IBM, and Johnson & Johnson are shaping up as great values,” says Schwab financial analyst Amit Dugar.
Big, diversified companies often are better able to weather a weaker economy, and they’ve been priced very cheap. Big multinationals that export to countries that have stronger currencies can benefit from the dollar’s weakness, too.
But if there’s a run on these stocks, they can catch up in a hurry, so be mindful of what you’re paying for them in terms of their earnings growth, book values and cash on hand.
[bul] Foreign stock risks. Over the last three years, European stocks have gone up an average of about 25 percent annually; Latin American stocks, almost 41 percent; and Pacific Region stocks, almost 19 percent.
That’s got to stop somewhere, right? Investors have been piling into funds that buy foreign securities, but that often happens just before a change in direction.
Earnings growth at foreign companies, which has been tearing along at double-digit levels, will probably slow down, suggests Rob Gensler, manager of the T. Rowe Price Global Stock Fund.
Gensler expects high single-digit growth, but says foreign companies, on average, could lose money if there is a global recession. And the continued strength of most currencies against the dollar makes US products cheap and foreign products more expensive and harder to sell.
Don’t dump the category; it makes sense to stay diversified globally. But do make an extra effort to look for strong international companies: those that are picking up market share regardless of how the overall economy is doing. And make sure market booms haven’t overweighted you on emerging market stocks or single-country funds.
[bul] Bond market warnings. Long-term bonds are paying less in interest than short-term bonds. That inversion means it makes more sense to stay short: keep your money at hand and your rewards higher.
“In an environment in which rates, volatility and spreads are low, we think the high-grade corporate bond market is the riskiest segment within the fixed income market,” says Michael Roberge, chief investment officer of US investments at MFS Investment Management.
The spreads between high-grade corporate bonds and Treasuries aren’t big enough to compensate investors in corporate bonds for the risks they are taking, he suggests. Increases in corporate borrowing for stock buybacks or leveraged buyouts could cause rates to rise, devaluing the corporate bonds already out there.
Instead, Roberge is telling investors who want to bump up their bond yields to look in the high-yield market, where default rates are low and corporate outlooks are bright enough to suggest they’ll stay low.
[bul] Bottom line, circa 2007. Things could get better or worse.
Timeless advice that works in most situations is this: Stay diversified and balanced into the new year. Trim holdings that have gone through the roof, and start buying bargains that others have ignored. Limit the riskiest investments to a small percentage of your portfolio.
And watch that space; it’s going to be an interesting year.
