2008 Outlook

The year started on a very meek note, with all indices faring lower as of date.
The Dow Jones Industrial Average (at 12,099) is down 8.8%, Nasdaq (at 2,340) down almost 9% and S&P 500 (at 1,325) also down by 9.8%.

Looking ahead, what’s the outlook for 2008? Are we going into a recession, or just slow growth? What’s the difference? Will the market recover in the second part of the year?

Well, clearly the danger of the “R” word is here, and it’s real. The “subprime crisis of 2007” as it may go down in history has put many investors in defense, as they don’t know how much of the story is unknown. The uncertainty sinks markets and this time is no exception. Even if we know the extent of the damages – but we don’t – who will come to the rescue. The foreign funds, you say? Sure, but under what conditions and what price? You know, you pay for discomfort just as you pay for convenience. But as a believer in free market economy, I may let this one unanswered for now.

Let see how 2008 may look. The housing is down, the stock market is down, there are not many asset classes left to inflate. Financial pundits are stepping on each other’s toes trying to guess: “is it slow growth? Is it (mild) recession?” The housing market will take many quarters to resolve, and this will impede the overall economic growth. The house prices are down about 10% average nation-wide, but from what I’ve read, they may have to go down about 15-20%. Margin call in housing market!

Fortunately, the corporate sector learnt its lessons from the 2000 bubble. By comparison, the inventories are now under control, balance sheets are much stronger. The returns on equity will come under some pressure, but we don’t know how long will last and how bad will get.

Will Bush’s tax stimulus package help? I like the urgency, and I think that any bit will help the economy, so I am a supporter of it. And an interest rate cut will also help, but it appears that the markets don’t really trust the academic face of Mr. Bernanke, and they will soon realize that just a rate cut lf 50 basis points is not enough. In fact, I think that the 50 bps rate cut is already priced in. Now, cut it by 75 bps and get the tax stimulus out, and that’s a bullish signal!

People also talk about the U.S. economy “decoupling” from the global economy, but that’s not possible. The emerging economies are in different lifecycles, and even China may cool off by 200 to 300 basis points, and grow only at 7-9%.
Japan has been a dog for years. The most positive factor for Japan in the past year or two has been the exports. With the yen rising, exports won’t contribute much this year.

The BRIC / CRIB economies will grow at 7-8% per annum, which is solid growth, showing that the global economy is still growing, but at slower pace. The growth will come mainly from the contributing middle class in the BRIC countries, especially China.