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Jeremy Siegel, Ph.D. The Future for Investors

Jeremy Siegel, Ph.D., The Future for Investors

Outlook for 2008: Markets and the Economy

by Jeremy Siegel, Ph.D.

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Posted on Friday, December 14, 2007, 12:00AM

It’s time to dust off the proverbial crystal ball and predict what’s in store for 2008. But before doing so, let’s see how I did with last year’s forecast.

Well, I was pleasantly surprised to see that I got quite a lot right despite missing the subprime crisis. I predicted that the economy was poised for a mid-cycle slowdown, similar to what we experienced in 1995, the year after the Fed had also raised rates.  I predicted GDP growth would slow in 2007 to 2½% to 3%, and despite the credit crunch, this estimate was very close.  Even if this quarter’s GDP grows by a measly 0.5%, GDP growth for 2007 will be at 2.5%.

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Finance Outlook 2008

Important Financial Events of 2007

For the US stock market, I predicted an 8% gain and greater gains for foreign markets. December still has two weeks to go, and given the recent volatility, the market could end the year anywhere.  But as of now, the S&P 500 Index is up 6.3%, while foreign markets have done significantly better.  The foreign developed markets, represented by the EAFE Index, have returned 15.6% and the emerging markets continue their torrid pace, chalking up a 42% gain.  Last year, I said that if US stocks climbed less than 8% in 2007 it would be due to $3 a gallon gasoline and the dollar falling below $1.45 per euro.

Subprime Crisis

Both barriers were breached, but the main reason for this year’s stock market malaise was the credit crisis, which, despite my bearishness on real estate, I didn’t see coming. I’ve written a fair amount about this crisis on Yahoo! Finance and downplayed its importance to the overall economy. Why? I never expected the fear of debt defaults to so swamp the reality of this problem. 

I think the actual number of delinquencies next year will be below what the market predicts, as investors have overreacted to the mortgage crisis.  When this happens, it could lead to a nice recovery in financial stocks.

Economic Growth

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.

Interest Rates

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 – you got a nice ride that you won’t get next year.

Oil

There are always events (or “risks” as Wall Street calls them) that can upend these forecasts and oil is always one of them.  Despite some promising political developments in the Mideast, history has taught me to be cautious. 

If oil surges past $100 a barrel for whatever reason, we will be in trouble. Three dollar gasoline did not prove to be the tipping point for the consumer in 2007.  But with a weak housing market, I believe $4 gasoline would do considerable damage to consumers’ pocketbooks in 2008.  And $4 gasoline would happen if oil rose to $120 a barrel or higher.

Politics

Of course, next year is a presidential election.  Although the primaries appear up for grabs now with Barack Obama and Mike Huckabee making a good run, I believe that the Democrats and the Republicans will nominate front-runners Hillary Clinton and Rudy Giuliani.  After a hard fought battle, Hillary will pull through as the electorate seems ready for a new party to govern from the White House.

Since I predict the Democrats will also keep the House and Senate, a Democratic sweep will send some nervous flutters through Wall Street. But Clinton will prove to be as moderate on economic issues as was her husband.  This means that although taxes will rise on dividends and capital gains when the current low rates expire in 2010, the increases will be moderate and Wall Street will be relieved.

I’ll wait until after next year’s election before offering up another set of projections for 2009.  In the mean time, have a healthy and prosperous new year!

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176 Comments

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  • Yahoo! Finance User - Monday, February 4, 2008, 9:21PM ET  Report Abuse

    • Overall: 1/5

    Gee... What a pile of crap. I would be surprised if 20% of these so called predictions were to come true. I predict: inflation 4-5%, stock market down 10-15%, Hillary vs. McCain, oil $120, recession H1 2008.

  • morris - Sunday, February 3, 2008, 4:58AM ET  Report Abuse

    • Overall: 5/5

    great atricle, i have a similar thought on investing. www.buildwealthtonight.com

  • Yahoo! Finance User - Thursday, January 31, 2008, 2:37PM ET  Report Abuse

    • Overall: 1/5

    Uh oh. Lots of wrong answers here. There is, of course, still time for the credit crisis to right itself, but with the trouble at the monolines, I am not counting on it. Meanwhile, he couldn't even see how unpopular Giuliani was, despite millions in spending on the primary? I hope this hurts his ability to peddle overpriced funds....

  • Glenn S - Monday, January 21, 2008, 11:15AM ET  Report Abuse

    • Overall: 1/5

    If Seigal is as correct on the market as he is on politics,were're all in big trouble....Also,it's january 21st ,and the Dow is about to fall below 12,000.That milestone was reached in October,2006...Can you spell r-e-c-e-s-s-i-o-n-????

  • DelJ - Friday, January 18, 2008, 10:43AM ET  Report Abuse

    • Overall: 2/5

    This "expert" completely missed the credit crisis, not recognizing ludicrous lending practices in place during all of 2006 and 2007 where any snot-nosed college grad coming out of school with no credit history other than unpaid credit card bills used to charge kegs for his/her dorm parties could, with a $50k a yr starting salary, come straight out of college and finance a $250k home. Alarm bells should have been ringing for these "experts" at what would happen when this credit insanity suddenly would end. Also, this ivory tower acolyte writes; "Three dollar gasoline did not prove to be the tipping point for the consumer in 2007." BULLS$%^. Since the effects of $3/gallon gas didn't show up within the too short of a timeframe established by the establishment knotheads, they assume there is minimal or no effect resulting from $3/gal gas. The fact is that ironically, that the ease of credit availability has led to record numbers of people having credit cards with which to charge their gas (pay at the pump makes this so easy) and instead of cutting back on unecessary trips when gas prices spiked, these people kept charging gas and carrying larger and larger balances forward every month that they couldn't pay for, until they finally realized this is a no-win-never-catch-up cycle of compounding 21% interest rates. This has finally happened and now the unable to properly plan average spend-all have to have everything NOW consumer (who drives 2/3 of our GNP - SCARY) has slowly realized that they need to cut back on spending since EVERYthing they buy is affected by rising gas prices. The ivory tower knotheads like this guy have FAILED to account for the credit card buffer to spiking gas prices that I list above.

  • Mind of Sauron - Tuesday, January 8, 2008, 12:58PM ET  Report Abuse

    • Overall: 1/5

    He missed the housing crisis? KudSiegStein strikes again: smartguystocks.com/?p=208

  • hafiz - Sunday, January 6, 2008, 6:59AM ET  Report Abuse

    • Overall: 3/5

    These are all his opinions which is not substantiated by any concrete reasoning. There should be positive facts otherwise its like gambling. thanks

  • Yahoo! Finance User - Saturday, December 29, 2007, 9:19PM ET  Report Abuse

    • Overall: 1/5

    Check out the S&P 500 from 1965 to 1980. It basically did nothing for 15 years! The S&P 500 opened at 85 in 1/65 and opened at 108 in 1/80 for a difference of 23 points or 27% gain over 15 years. This doesn't include dividends but still is nothing to get excited about. The point is the stock market is not just bull and bear markets but can be flat for years. Of course what the overall market does is not necessarily indicative of what individual stocks will do.

  • Yahoo! Finance User - Sunday, December 23, 2007, 1:43PM ET  Report Abuse

    • Overall: 2/5

    There are always two sides of any story. Robert Shiller from Yale is also a big economist and future forecaster. He thinks differently about next year, and next a few years. One of the two will be wrong. Can we tell who will be wrong now? probably not. That's why they have their jobs.

  • Yahoo! Finance User - Saturday, December 22, 2007, 10:54AM ET  Report Abuse

    • Overall: 1/5

    Give me a break... too much in the way of COULD vs will. Get behind the predictions or turn in your opaque cristal ball.

  • Johnson - Saturday, December 22, 2007, 10:08AM ET  Report Abuse

    • Overall: 4/5

    it shows abundant materials which are so convincing.

  • Yahoo! Finance User - Saturday, December 22, 2007, 12:56AM ET  Report Abuse

    • Overall: 1/5

    There's no recessions. Stop with the "sky is falling, I'm chicken little..". ...go out, spend money, enjoy life. Oil is at its peak, and can only go down from here.

  • Deathmaster Jesus - Thursday, December 20, 2007, 5:24PM ET  Report Abuse

    • Overall: 2/5

    He has some good points but is way too optimistic on the credit crisis and housing. There are indications that delinquencies will actually INCREASE through 2009! Too much equity is being lost. No, the next couple of years will be kind of rough. Shop for bargains and look for brighter days after the election.

  • C - Thursday, December 20, 2007, 3:12PM ET  Report Abuse

    • Overall: 1/5

    Every time I follow what Dr. Siegel's advices, I am not doing as good as I was on my own. Therefore I just ignore his article.

  • mike - Thursday, December 20, 2007, 2:21PM ET  Report Abuse

    • Overall: 1/5

    This guy has no idea what is going on. The subprime and credit crisis will send this country into a recession. And that is if were not already in the intial stages on a recession right now. Houses are peoples biggest asset and it is an asset that is declining. Also 70 percent of GDP is made up of consumer spending. Most of this spending was fueled by easy credit.With the credit crunch and declining house prices consumer will have to start to live within their means. Rising fuel and food prices are also going to add to consumer spending problems. Not to mention it is going to effect the bottom lines of countless business's. I might not have a Ph.D, but I do have common sense. If you believe this guy than you will get what is comming to you.

  • Ashraf M - Thursday, December 20, 2007, 2:16PM ET  Report Abuse

    • Overall: 3/5

    I like your predictions about the stock and oil, but I dont agree with what you have to say about the presidential race. Although America is very advanced, but we are still not ready to have a FEMALE president. Lets wait and watch

  • Yahoo! Finance User - Thursday, December 20, 2007, 2:15PM ET  Report Abuse

    • Overall: 5/5

    As is generally the case, I believe moderate predictions are best. The electorate is ready for change in the policies of the presidency, as indicated during the last congressional elections. I am very puzzled as to why there is no discussion about the "core" reason for investing in real estate. To me, that reason would be for protection of the elements, and to have a place for family to gather. I don't really care if my real estate investment depreciates a little in '08, for over the long haul, RE will always appreciate. And, in the mean time, I can enjoy my home. Remember, this last real estate crises was not caused by sub prime borrowers, but by all buyers paying too much. Unless you are a real estate investor, wheeler and dealer, and willing to take huge risks for the prospect of huge gains, (or losses), you should buy a home based on affordability, your ability to pay, and whether it will serve your needs or not. I think too many people in this country have lost sight of the "core" reasons for purchasing real estate.

  • paul - Thursday, December 20, 2007, 2:13PM ET  Report Abuse

    • Overall: 4/5

    I agree with most of what you say. I think the Fed will be more concerned with inflation than growth and may raise interest rates forcing producers to be more efficient and consumers to slow purchasing. I think growth will be between 0 and 1.5%. Clinton will probably be the next president. The republicans don't have a chance. Obama may be popular but voters know more about Clinton-good or bad-than they do about Obama. From an economic stand point, Bill was a good president. He didn't interfere with the Fed and his priority was long term growth and not what would be best to get him reelected.

  • B. - Thursday, December 20, 2007, 2:12PM ET  Report Abuse

    • Overall: 5/5

    Go to Google and Type in Mondex.INC VERICHIP and see what Bush & Clinton have going for us now !!!

  • LesleyB - Thursday, December 20, 2007, 2:11PM ET  Report Abuse

    • Overall: 4/5

    Interesting article. I think pehaps it is a bit too optomistic, with the situation in China and the world looking at the Euro as the standard for purchasing oil. Also, why are so many, particularly men, so afraid of Sen. Clinton? Men have been running this country for the last 200 years plus - let's give a woman a chance. She can't do worse than all thos war-mongers of the present and the past. Personally, I want a President who finally looks and acts more like me! Give her a chance.

  • Yahoo! Finance User - Thursday, December 20, 2007, 2:07PM ET  Report Abuse

    • Overall: 1/5

    I love America. Born in Indiana and an optimistic believer in our nation and the visions of our founding fathers. That is why it is beyond pitiful to realize and admit that kurtdabear has it right. We all have allowed our beautiful wondeful America to be squandered away in the name of greed.

  • lisa - Thursday, December 20, 2007, 2:04PM ET  Report Abuse

    • Overall: 1/5

    Jeremy's thoughts on senater Clinton being a moderate is a joke ! He really must be clueless. Who is the idiot that gave this guy a colume ? YOUR FIRED

  • royhobbs - Thursday, December 20, 2007, 2:00PM ET  Report Abuse

    • Overall: 1/5

    BORING!!! I must admit I get a kick out of reading the mundane, silly predictions of dorks like this with Ph.D's in economics. Economics has been called "the dreary science" and you can see why. Of course, he's hoping for a Hillary/Giulani race: the thought of real change that would elevate the middle class (Edwards, Obama) scares these guys because they don't want it to work. Did Alan Greenspan ever utter a clear sentence in the English language while he was Fed Chairman? (Now, of course, he's got plenty to say). These guys are good for comic relief but that's all.

  • Bob S. - Thursday, December 20, 2007, 1:51PM ET  Report Abuse

    • Overall: 5/5

    I think Congress needs to Block President Bush. Congress Spends the Money not The President. They are also taking our Rights Away to and the People are Lazy and won't do anything to tell them that they Work for Us ! The War needs to End. $4.00 a gallon Gas next year to. They are not telling us the truth and it need to Stop.

  • Yahoo! Finance User - Thursday, December 20, 2007, 1:49PM ET  Report Abuse

    • Overall: 1/5

    If he thinks Hillary Clinton will be elected President of the United States, he has lost all credibility.

  • the mad doctor - Thursday, December 20, 2007, 1:41PM ET  Report Abuse

    • Overall: 1/5

    How can one give much weight to someone who missed the subprime debacle? It was so obvious that this whole real estate thing was a giant bubble. The quality of borrower declined and homes became less affordable. Not to mention the huge amount of equity taken out. The so-called prosperity has been fueled by debt of all kinds. The numbers are cooked: Inflation, employment, federal deficit among the biggies. The stock market has not done squat when measured against gold, oil or other major currencies such as the Euro and Pound. All this decade has really done is build huge debt on all levels, created the Chinese monster, sold off our nation to other countries and gutted manufacturing. And of course enrich the aristocracy of our governement, corporations. Intervening in the business cycle is like not respecting the sleep-wake and activity/rest cycle of the body. When the caffiene of the nineties wasn't doing it anymore, we got hooked on crank. Time for rehab. Or death.

  • Ice Nine - Thursday, December 20, 2007, 1:30PM ET  Report Abuse

    • Overall: 4/5

    Anyone voting for Giuliani is a stone cold idiot who shouldn't be voting because they are easily persuaded by Politico's propaganda. His friend is going to jail for fraud who he hired as Police Chief, which means you can't trust his judgment in appointing officials. He grossly exaggerates his importance during 9/11, even saying he was at the site more than many of the fire department and police volunteers, which means he's a liar that can't be trusted. He used New York City tax dollars to give his mistress professional security guards, which means he can't be trusted with national funds. Then he lied about it when he was confronted with the information, which reiterates the fact that he's a liar. He constantly excused police shootings and abuse of innocent people, but still managed to lose police and fire department support during his 8 years as mayor. He was pro-abortion and anti-gun during his years as NY mayor but now try to explain that his position was a management ploy, which means he has no conviction and he's not a real Republican. He left New York with millions of dollars worth of funding debt, which reiterates the point he can't be trusted with public money. He cheated on his wife and threw her out of the Gracie Mansion while he was still married and dating some other woman. He has been married four times (one with a cousin). His own kids won't campaign for him because he's such a vile human being and dad. The facts speak for themselves. None of this stuff is made up.

  • FirstL - Thursday, December 20, 2007, 1:22PM ET  Report Abuse

    • Overall: 4/5

    I do enjoy this article by Dr. Siegel. As he pointed out, the biggest discrepency in his prediction is the subprime crisis. In fact this crisis is a game of financial institutes who ran out of tangent to compete in getting customers. It was not a healthy lending practice to begin with, so the results are countless write-down in the recent quarters. I also agree strongly with Dr. Seigel that the financial sector would do better than S&P next year because all the write-downs could very well exceed the actual equities loss.

  • Kurt - Thursday, December 20, 2007, 1:21PM ET  Report Abuse

    • Overall: 1/5

    This guy seems to specialize in making safe, mundane forecasts built on median figures from recent years' average economic performance. Our nation is not, however, in ordinary times, and his bets will be blown out of the water this year. The U.S. will enter a long term recession early in the coming year, and it could even morph into a new Depression. Unlike during the Great Depression, few Americans will be able to save themselves because most have no savings, and the government will not be able to save them because it's already over $60 Trillion in debt. Why will there be a major recession? Because our spendthrift federal government has blown our nation's savings, gone deeply in debt, and devalued our currency. Now they're between a rock and a hard place. Every time the Fed lowers the interest rate to help homeowners, the $ sinks against other world currencies, which raises the price of everything we import, i.e., lots of oil. So oil will go over $100 (unless we have a total depression), the consumer will suffer, the economy will tank, etc. Rising oil will increase the blind rush to alternative fuels, such as ethanol, which is a losing proposition and which drives up the cost of food. And if they raise interest rates to shore up the $, they will drive consumers into bankruptcy and cause many more of our major banks and institutions to fail--so whatever they do, the average American stands to lose a lot. I predict they'll keep lowering interest rates because it's the most politically expedient thing to do and will take longer to make its damage clear to the American public. Also, as the devalued $ continues to drive up the price of oil, the politicians can continue to blame greedy Arabs and oil companies for our troubles while distracting the public with new wars in the Middle East. (Don't be surprised to see a revival of the military draft some time in the near future, as we're running low on bodies to fight our militaristic adventures. Also a draft takes people out of the private economy and helps keep employment figures looking better.) So the Fed and the continuing government deficits, which have both led to the destruction of the value of the dollar, are leading us down a path of poverty and starvation. The you-know-what will really hit the fan when the world drops the dollar as the world's reserve currency. As far as Hillary winning the presidency, I can't predict that at this juncture of the campaign, but we can only hope she doesn't because she's far from being a moderate--she's a Stalinist Socialist. If she's elected, she will use the fascistic security laws of the Bush Administration to quash dissent and liberty in ways that W and the neo-cons never imagined. In short, the U.S. is in perilous times, and we have what is largely a bunch of bums and incompetents running for president.

  • Wilson - Thursday, December 20, 2007, 1:16PM ET  Report Abuse

    • Overall: 3/5

    No one knows for sure what will happen next year. Definitely, my prediction is that Sun will rise. We all predict some different scenarios. Once our prediction is right, we claim that we have predicted the future. For those who predicate the future wrong, will try to hide and forget their claims. My prediction is that 2008 will be another average economic year. Huckabee will be the president because America is not ready for a female president. China slowly will go into economic slow down and its oil consumption will be reduced, therefore; oil price gradually will fall and will create another economic boom in the west especially in America. Housing market will be sluggish and prices will fall further. North Korea, Iraq, and Iran problems will be resolved slowly and oil prices will fall.

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