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Analysts predict tough 2007 for investors

By HELEN HUNTLEY
Published January 1, 2007

Just when it seemed safe to relax and count all the money we've made in the stock market this year, along come warnings not to expect smooth sailing in 2007.

"Fasten your seat belt because there's going to be some volatility," said Clearwater financial planner Ray Ferrara at ProVise Management. And he's one of the optimists.

Get Steve Bolten or Dick Bove in a corner at a New Year's Eve party tonight and you might feel like you have a hangover before you've downed a single drink.

"We've got an absolute bubble," said Bolten, a financial economist at the University of South Florida in Tampa. His forecast: higher inflation and government deficits, lower housing prices and tax revenue, a squeeze on corporate profits and a continuing drop in the dollar. His advice: "Buy your flat-screen TV this year because next year it will be higher." Oh, and put any money you have left in a money market fund.

Bove, a Lutz strategist with brokerage Punk Ziegel & Co., says our stock market gains have given us the illusion that things are fine with the economy: "We're just swimming in money," he said. "That cash has very few places to go if the economy is weakening, so it goes into financial assets."

In his view, the good times can't last. His cheerful take: The housing market is down and will stay that way for a decade, one of several reasons he thinks there's a good chance the new year will bring a recession. Longer term, he predicts higher interest rates as foreigners pare back their holdings of U.S. debt.

It's enough to make me want to hide under the covers.

As usual, the investment climate is a stew of contradictory signals, ranging from economic indicators to investor psychology to technical market trends and statistics to the presidential election cycle the third year is historically the best in the four-year cycle.

It's a fact that the economy has slowed, which is negative for corporate profits and thus stock prices. But the length and depth of any downturn is speculation. The National Association of Manufacturers forecast last week that economic growth will drop from 3.1 to 2.9 percent next year, providing the hoped-for soft landing in spite of declining housing prices and high energy costs. The association thinks that will lead to the Fed cutting short-term interest rates by half a percentage point by mid year.

The outlook is good enough that Standard & Poor's Corp. is predicting a 10 percent return, including dividends, on its 500 Index of blue-chip stocks. And many money managers are optimistic.

"We think earnings growth is going to continue to be strong," said Tampa money manager Dee Howland of Howland & Associates. "There are certain pockets of the market that we don't want to be invested in where there are still problems, such as housing, but there are plenty of other things that look strong, such as technology." And, she says, prices are reasonable.

"We are finding more things that look interesting to us in the big-cap stocks than we ever had before," she said. Howland specializes in large growth stocks, which are attracting more investor interest on the theory that small stocks' outperformance may be ending.

Ferrara said he finds stock prices in a comfortable range except for some high-flying sectors such as emerging markets and real estate stocks. But he said even reasonably-priced stocks can tumble:

"We haven't had a significant correction since summertime, which is a long time not to have had a pullback," he said. "I think we're looking at a year which will require a lot of patience. There will be a lot of volatility, and investors are going to have to weather the storm."

St. Petersburg investor Adrian Nenu, a Pinellas County detention deputy, said such uncertainties emphasize the importance of diversifying investments and keeping your mix of stocks and bonds in balance with a comfortable level of risk.

"Since there is no way to predict which sector or regional area of the world will outperform, the only solution is to diversify globally," he said.

Amen.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at blogs. tampabay.com/money

[Last modified January 1, 2007, 05:54:12]