Now that the year is drawing to a close, the flow of Wall Street prognostications for the new year has begun. The tone of the prognostications we have thus far seen is: gloom and cautioun. This brings to mind last year's round of predictive pronunicamentos: they were characterized by a near-universal consensus among the market strategists that 2007 would be an outstanding year in the market. One noted guru, himself known for his traditionally bearish stance, observed about him and his confreres at other firms: "This year we are all bullish." Well, with the market as measured by the S &P 500 up barely 3%, we can see why a skeptical attitude toward the Wall Street consensus has so much to recommend it.
Of course, a predominant factor in shaping strategists' view of the coming year is informed by the actual performance of the prior year. Here, the deeply engrained tendency to extrapolate the past into the future, and label it "forecasting" plays a crucial role. For this reason alone, the Wall Street consensus view usually constitutes more of a CONTRARY SIGNAL than a reliable compass for the coming year. Wall Street strategists, it would seem, are no less susceptible to being ruled by their emotions than the Great Unwashed, to whom they peddle their rather shopworn wares.
Since the key to investment wisdom is doing what is doable, we will leave the predictions of the market for 2008 to the professional predictors. We prefer to focus upon individual equities, whose prospects are far more predictable than the "market." We would also reiterate a point we have made in previous posts: there is little point in talking about "the market" when there are, in fact, essentially two economies and consequently, two markets. Over the past year we can see the dramatic differential in results: with "the market" +3%, investors in financial, real estate, and retail stocks got KILLED (with 20-50% declines or more in individual equities in these sectors common, and sector bear markets carrying group indexes down well over the 20% mark which definitionally constitutes a bear market), while energy and utility stocks achieved strong bull market gains.
For those concerned about the risk of an overall bear market pulling down all stocks regardless of which "economy" and which "market" they partake of, we would note that, while possible, several facts should be borne in mind regarding the overall backdrop for U.S. equities:
1. The down-cycle in interest rates is solidly underway, with more to come;
2. Real estate continues to crumble;
3. Foreign markets are overpriced; "emerging" markets look to be more likely to submerge than emerge, given the absurd overvaluation of some of them;
4. Overall market valuations are on the cheap side relative to earnings (excluding the financial, real estate, and retail sectors);
5. Fear levels are very high.
Historically, this kind of environment has signalled a major buying opportunity, rather than a sell point. Even if that is not the case in 2008, a serious bear market preventing signficant upside moves in carefully selected, undervalued equities which reside in the strong sectors of the economy seems unlikely.
Deep pockets of opportunity exist in the current, highly inefficient market. With huge pools of foreign money searching for investment opportunities, with a depressed dollar magnifying the purchasing power of these foreign pools vis-a-vis high quality American assets, and with a huge pile of cash built up in money market funds by frightened American investors, we remain of the bullish persuasion. Ultimately, price will reflect value. With many high quality U.S. stocks significantly undervalued, we believe that the risk/reward ratio in this sector is compelling.
