Jeremy Siegel 2008 Outlook:
Jeremy Siegel is always worth listening to. Hereâ€™s part of his outlook for next year:
But the impact of the crisis on the psychology of consumers and business will leave their mark. I predict that GDP will slow in the first half of next year to between 1% and 2%, and rise in the second half, as risk premiums come down and the cost of capital falls. Overall I expect 1.5% to 2.5% GDP growth in 2008 and I believe the economy will avoid a recession.
Stocks and Bonds
I think the stock market will have another winning year in 2008. For every percentage point that stock returns fall below 8% (my prediction) this year, they should exceed 8% next year (meaning, for example, if stocks gain 6% this year, they should finish 2008 up 10%).
And I believe that financial stocks, which have plummeted 18% so far this year, will outperform the S&P 500 Index next year as the credit crisis fades.
What does all this mean for interest rates? The Fed cut the Fed funds rate to 4.25% on December 11, but it will have to do more in the coming months. I believe that the Fed will get rates down to 3.5%, before ratcheting them upward in the second half of next year.
Treasuries did well in 2007, as interest rates on top-rated securities plunged in light of the credit crisis. But as the risk spreads narrow, money will flow away from government bonds and their interest rates will rise. I recommend investors cash in governments and top rated corporate bonds now â€“ you got a nice ride that you wonâ€™t get next year.