#7652 Jan 7, 2008
Stocks, politics '08: a bumpy crossroad
Monday, January 7th 2008, 4:00 AMLast year was a wild year for the stock market and the economy.I believe 2008 will be equally wild:Afterdecades of buying everything in sight, the average American will cutback on spending. Retail sales will slip, and people may finallyrealize that the nation has too many stores and restaurants.Without a strong consumer base, the U.S. economy will slip into the first full recession in about 17 years.Theslowdown will have an impact on the rest of the world, but it will bemuch less than expected. Europe, China, India and oil-rich nations willcontinue to grow, showing for the first time since the end of World WarII that the U.S. is not the sole driver of the world economy.Theconsumer-driven recession will be made worse because banks, burned bythe subprime mortgage crisis, will refuse to lend to many people whoneed money.To keep the economy afloat and encourage banks tolend, the Fed will keep dropping rates, good news for anyone who wantsto borrow (but doesn't have trouble borrowing). But it will notconvince banks to lend to people with questionable credit. So therecession may last longer than many people imagine.The dollarwill keep dropping against most major currencies. Foreign governmentfunds will make major investments in blue chip American companies.Foreign companies will acquire their U.S. customers. These acquisitionswill cause a political outcry from both the political right and theleft.Oil prices will be volatile, ranging from $75 to $120 abarrel, but they will end the year at the high end. In the past, aslowdown in U.S. consumption has led to lower oil prices. But thisyear, this trend will not hold, as a decline in production from olderoil fields coupled with an increase in demand from India, China andother countries pushes prices to record highs.Gold and otherprecious metals will continue to gain in price. Food will also becomemore expensive, as a combination of increased demand from developingcountries and the use of corn in ethanol propel demand.Theunemployment rate will increase as ripples from the slowdown inconsumer spending hit other parts of the economy. Amid a slowdown - buthigher prices for food and energy - we will begin to hear thatdescribed by the dreaded word, stagflation.Home prices willcontinue to drop nationally as vacant supply far exceeds demand.Commercial real estate will also weaken. The bottom will be reachedwhen former teachers, nurses and countless others who became realestate brokers return to their original occupations or retire.Corporateprofits will also be disappointing. Most Wall Street analysts arepredicting strong growth for a slew of companies in 2008. Many will bedisappointed.The political landscape will turn away fromfamily values and international issues and focus on the economy.Middle- and lower-middle-income Americans will reject the idea thatwhat's good for billionaires is good for them. They'll demand answersto basic issues such as affordable housing, health care and education.In a slower economy, immigration will be a hot issue.Theslowdown in the economy coupled with weaker corporate profits will leadto a lower stock market, especially in the first half of the year. Asthe election approaches, the Democrats will be far ahead in the polls.Wealthy investors, concerned that a Democratic administration will rollback the Bush tax cuts, will sell stocks, pushing down the market atyear end.My predictions may sound gloomy, but I believe 2008 may be a pivotal, positive year.Why do I envision a happy outcome?Because it will be the year we finally face up to many of our problems and set a better path for our future.Your Money columnist Peter Siris is an investment manager at Guerrilla Capital in Manhattan.