Wednesday, January 9, 2008

Lots of Unknowns

The market has been selling off pretty furiously to start 2008. We've heard the warnings from the media, but now we're getting them from Merrill and Goldman, which makes me listen a little more. On the flip side, Fed president Bill Poole said, "The fundamentals of our economy remain strong ... and 2008 looks to be a year of rising growth."

Judging what I've seen from most economists, the early part of 2008 should have pretty slow growth while banks sort out their mess, but the economy should pick up in the second half of the year. The difference in viewpoints is how much will growth contract, and how long will it last? Because of the growing global economy, the rest of the world may not be affected as much as in a typical US slowdown. It also may pull the US out of its slowdown more quickly as well.

Look at Dupont for example. They guided 2008 earnings up based on strong demand in emerging markets. This could be the case for a lot of larger US based companies, and this is where it becomes harder to predict things. Typically when the US slows down, the market goes into lockdown mode, and investors buy health care stocks and bonds, etc. But the emerging market growth is what could keep things afloat.

All of this remains to be seen. I'd continue to be cautious, while looking hard at valuations on stocks we've been looking to get into. I do think there will be more volatility and potential losses ahead, but it wouldn't be smart to commit fully in one direction. If it makes you comfortable, hedge your positions with some ETF's that short US indexes.

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