Market Outlook for 2008

Alright, since my mutual fund research process has been slowed down somewhat, I will share my investment thoughts/expectations for the year.

Interest rates: I think there will be additional, albeit smaller (25bps), interest rate cuts in the future, but 2008 will NOT end with interest rates below 3%. For interest to stay that low (or lower) for that long would mean that U.S. economy would be in absolutely dire economic shape by the end of the year (which I obviously don't foresee happening) and/or that Fed will forget about its duties to monitor inflation.

Stock market: Overall stock market will rise in high single-digits or low double-digits because there are more sectors and companies with strong earnings than those going into the red in 2008. Financials sector is likely to gain a significant momentum by year since the subrime market crisis has pulled down many sound financial institutions and even punished too severely those who did deserve to be punished. Once investors will see that those companies are still making money and lots of it, they will create plenty of demand to push share of those companies up.

Attractive sectors/industries: Besides Financials, I think that Healthcare, Technology, and Consumer Staples will outperform the overall market.

• Healthcare sector tends to be independent from the overall market conditions and here is what in particular I like in Healthcare: Big Pharma and biotech stocks have been beaten down and are likely to show solid results. Companies such as AstraZeneca and Amgen have plenty of high-potential products in the pipeline and are currently selling at attractive prices. Medical equipment manufacturers should also benefit from the rising medical costs, one that I like in particular is Medtronic.


• Technology companies will benefit from renewed focus on efficiency (as always happens during economic downturns), constantly increasing demand for bandwidth and data storage put these companies in a good position: Cisco, Accenture, and EMC are the ones that I would pay attention to. Microsoft is also likely to post strong earning growth in 2008 as its Vista OS will receive wider implementation among business users.


• Consumer Staples such as Johnson & Johnson and Procter & Gamble have diversified portfolios of consumer products that people need on a daily basis regardless of the overall economic conditions. Currently, both of these companies (especially J&J) are selling at attractive prices.


• In general, large global companies who do not depend on the outside financing and have strong presence in the emerging markets should do well relatively to the overall market.

Will the Financial Sector Rebound Again?

Financial sector has tumbled once again in this post-subprime-mess era. What I'm wondering right now is whether it will make another come back after the Fed meeting on October 31st. It has rallied after the discount rate was cut in August and kept going up even faster after the Fed has cut the prime rate by 50 basis points at the September 18th meeting.

Fed is widely expected to cut the interest rate again at the next Fed meeting on October 31st. Although this time it will probably be cut by 25 basis points. Will the cut motivate the markets to surge ahead despite the deep problems a number of large financial firms face? Will the 25 basis points cut be enough? I don't know and I doubt anybody else knows either. But no matter which way the market will go, further development will definitely be interesting to watch.


One company I've been watching is Bank of America (BAC). It has a very solid business model, robust earnings, and is the only truly nationwide bank in the U.S. I'm wondering how low the stock will go, but, as we all know, trying to time the market and trying to get the lowest bargain price before the stock rebounds is more of a gamble than a prudent investing strategy. Either way, I'd prefer to wait out and get in at the beginning of an uptrend than at the end of a downtrend.

Global Trade vs. Protectionism

Now, I'm not an economist and I don't pretend to be one, but the case for protectionism makes no sense to me. Let's look at Pros for both protectionism and global trade:

Protectionism

• Protect domestic jobs from unfair foreign competition
  
• Reduce dependence on foreign products for "strategic" reasons
• Is that...it?

Global Trade

• A growing GDP: currently 1.4% of the U.S. GDP growth is attributed to the global trade
• More jobs as U.S. companies are more stable and growing thanks to the global trade: U.S. firms derive 29% of their profits from overseas operations/sales
• A stable economy: stagnation in U.S. industries is offset by growth overseas which is reflected in the financial markets
• Increased innovation: with additional competition from abroad U.S. companies are under pressure to innovate and deliver new, better products for less

If a simpleton like myself can see more good coming from the global trade than bad, then why can't those smart gentlemen and ladies on the Capitol Hill see that, with all their advisers and what not? Ohhh, right, right, I forgot. I forgot about the lobbyists of the failing industries that have been complacent for decades and instead of investing into R&D and becoming more efficient and innovative were just pocketing the profits. Now that they have competition and can't compete, they decided that paying lobbyists to get rid of the said competition will be a better investment than becoming formidable competitors in the global marketplace.

Or maybe I'm just oversimplifying a very complicated subject that is way over my head. Maybe.