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Bear or bull? What does 2008 have in store?

Presidential election years usually turn out to be positive for stocks. Here's what the experts expect as we head into one in earnest.

By Helen Huntley, Times Personal Finance Editor
Published December 30, 2007

If you're looking for guarantees, sure things and a market forecast you can take to the bank, your timing is off. With the economy teetering on the edge of recession will it or won't it fall off the cliff?, certainty is in short supply.

There's no shortage of reasons for investors to feel skittish and be cautious. After all, the economy quite obviously is slowing down, and that can't be a good thing for corporate profits, which provide the foundation for stock prices in the long run. And the credit and housing markets still have to right themselves.

But at least to some extent, those things already are factored into stock prices. What matters now is whether the situation turns out to be better or worse than investors expect.

"The market looks ahead," said Rodney Johnson, president of the H.S. Dent market research organization in Tampa. "It already knows what it thinks about the subprime mess. ... We don't look for the economy to be strong in any sense until the ending of the first quarter or the beginning of the second. We think the stock market will perk up ahead of that because it is a forward-looking indicator."

But others look at the numbers and come to different conclusions.

"I see a rough year ahead," said Tom O'Brien of Clearwater, who analyzes the market for his radio broadcast, newsletter and books. "I'm looking for us to go back to 2006 lows. The banks have gotten us in a lot of trouble here."

One thing the market has going for it is that 2008 is an election year, and election years usually are positive for stocks. The theory is that the party in power wants to stay that way, giving it an incentive to try to goose the economy through government spending and Federal Reserve Board actions on interest rates.

Historically, the election connection has held true no matter which party won. Many investors fear Democrats will raise taxes; favorable treatment for capital gains and dividends could be their next target. But in the past dozen elections, investors fared best in 1976 and 1996, which is when Democrats Jimmy Carter and Bill Clinton won the presidency.

"Since the second World War, there's never been a recession in a presidential election year," said Clearwater financial planner Ray Ferrara of ProVise Management Group. He said he doesn't expect one in 2008 either, partly because "Congress showed us they want to spend money to help everybody and make them feel as good as possible."

The Fed's recent efforts to lower short-term rates and provide banks with enough cash to weather the credit crisis should help the economy. However, the Fed is approaching the limits of its willingness to be accommodating.

"We have inflation at or near the top end of the Fed's tolerance range," Wachovia Bank economist John Silvia said. That means, he said, that we're less likely to get a stock market rally based on expectations of further Fed easing. The bank's prediction: just one more cut in interest rates, in January, with the Fed starting to raise rates again in late 2008 or early 2009 as growth picks up.

Election rhetoric also could add to the volatility of the stock market as investors react to what leading candidates propose.

Other factors also are at work.

Technical trading trends have portfolio manager Grady Garrett convinced that prices are headed higher.

"The lows in November were not as low as in August and March," said Garrett of LBS Capital Management in Clearwater. "We think the market is poised to move higher here. We may get some more chop, but we think, in general, the big caps, the Standard & Poor's index, will move higher."

Raymond James investment strategist Jeff Saut said the weak dollar will continue to be a plus. It makes U.S. goods cheaper in overseas markets and makes U.S. assets and tourism more appealing to foreigners.

"The dollar won't keep dropping, but it still will have a tremendous effect," said Saut. "I paid $40 for a pizza in London and $8 for a cup of hot chocolate. Milan was no better, and neither was Paris."

However, Saut says he thinks it's best to be cautious until we have a clearer picture of consumer spending, the extent of the problems in the mortgage market and where the bottom might be for the housing market.

Nobody seems to be wildly bullish, but that's probably a good thing since exuberance often is a sign of a market approaching a top. Financial advisers polled by Investment News are expecting stocks to gain about 7 percent in the new year.

Money managers are trying to do better than that by targeting the stocks and sectors they expect to perform best.

"Technology and health care are two sectors we're overweighting," said St. Petersburg money manager Timothy McIntosh at Strategic Investment Partners. "We're focusing on the big multinationals." His favorites include Oracle and Microsoft in technology, Novartis and Schering-Plough in health care and Colgate Palmolive in consumer products.

He and some other managers say they are staying away from high-yield stocks such as utilities and real estate investment trusts. They could be hurt by the possibility of higher tax rates on dividends and rising interest rates.

Technology also appeals to St. Petersburg portfolio manager John Carlson. "That's where we are seeing the best mix of company fundamental momentum and valuation," he said.

For the really brave, there's the battered financial sector.

"The more contrarian you want to be and the purer the value player that you want to be, the better financials look," Carlson said. However, he warns that "you really need to see signs that conditions in the financial arena have stabilized."

The underlying fear is that many companies own more questionable debt investments than they have revealed.

Lutz analyst Richard Bove says bank stocks are attractive now because fears are overdone. "It makes little sense to sell the industry because a few big banks have difficulties in a business unique to their efforts," said Bove of Punk, Ziegel & Co. "Bank stocks have already reacted to reflect the worst potentials." The banks on his buy list - all prominent in Florida - include Bank of America, Wells Fargo, BB&T and Regions Financial.

Diversified portfolios will continue to include foreign exposure, but it may not produce the stellar results it has in recent years.

"Overseas markets are probably going to continue to outperform the U.S., but the spread probably won't be as big as it has been," financial planner Ferrara said. In fact, he thinks the U.S. markets may attract more foreign money. "Our stock market is probably undervalued relative to other equity markets around the world. Investors may see more opportunity here than other places."

Johnson at H.S. Dent thinks foreign stock valuations are "out of control," especially in the emerging markets of Asia.

No matter where you're placing your bets for 2008, you probably should prepare for a rough ride.

"We'll still probably have a positive year next year, but there will be a lot of turbulence all the way through," money manager McIntosh predicted. He said he expects the market to decline 15 percent before it moves up.

Fasten your seat belt.

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.

How the Dow Jones Industrial Average performed during the past dozen presidential campaigns:

1960 John F. Kennedy -9.34%

1964 Lyndon Johnson+14.6%

1968 Richard Nixon +4.27%

1972 Richard Nixon +14.58%

1976 Jimmy Carter +17.86%

1980 Ronald Reagan +14.93%

1984 Ronald Reagan -3.74%

1988 George H.W. Bush +11.85%

1992 Bill Clinton +4.17%

1996 Bill Clinton +26.01%

2000 George W. Bush -6.18%

2004 George W. Bush +3.15%

Average +7.68%

Source: Morningstar Inc.

[Last modified December 28, 2007, 20:08:47]