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.
-
Here's How To Get Organized And Work For YourselfWhether you’re looking for a side gig or planning to start your own business, it has never been easier to strike out on your own. Here is our guide to navigating working for yourself.
-
How to Manage Risk With Diversification"Don't put all your eggs in one basket" means different things to different investors. Here's how to manage your risk with portfolio diversification.
-
Europe Faces Economic and Political Headwinds Next YearThe Letter Challenges for Europe: Potential tariffs, high energy prices and more competition from China will weigh on the bloc in 2025.
-
Don't Sleep on Japan's Economic TransformationThe Letter After almost three lost decades, Japan — one of the world's biggest economies — is finally showing signs of life.
-
Kiplinger Outlook: Telecom Companies Brace for Tough TimesThe Letter The telecom industry is entering a new era that threatens profitability. But the coming Trump administration will make it easier for the major players to adjust.
-
Start-ups Trying to (Profitably) Solve the World’s Hardest ProblemsThe Letter More investors are interested in companies working on breakthrough science to tackle huge societal challenges. The field of deep tech has major tailwinds, too.
-
The Big Questions for AR’s FutureThe Letter As Meta shows off a flashy AR prototype, Microsoft quietly stops supporting its own AR headset. The two companies highlight the promise and peril of AR.
-
China's Economy Faces Darkening OutlookThe Letter What the slowdown in China means for U.S. businesses.
-
AI Start-ups Keep Scoring Huge SumsThe Kiplinger Letter Investors continue to make bigger bets on artificial intelligence start-ups, even for small teams with no revenue. Some backers think a startling tech breakthrough is near.
-
Should We Worry About the Slowing U.S. EconomyThe Letter With the labor market cooling off and financial markets turning jittery, just how healthy is the economy right now?
