By most accounts U.S. markets fared surprisingly well during 2007 considering the amount of bad news.
Slowing economic growth, a deepening housing correction, rising foreclosures, rapidly depreciating mortgage investments and shaky credit markets were just a few of the issues that loomed over investors.
Thanks in part to the Federal Reserve's efforts to ensure liquidity and stave off recession by lowering the federal funds rate, stock markets managed to close the year with relatively strong gains.
"The (U.S. equities) market really has absorbed some real body blows" this year, said William Buechler, principal of Buechler Capital Asset Management, based in La Jolla. "I think given everything that's happened it's been a pretty good performance."
Still, the same fundamentals that spooked investors in 2007 will continue in 2008, experts anticipate.
Subprime mortgage resets aren't scheduled to peak until the end of 2008 and most forecasts have abandoned the notion that home prices may begin to rebound prior to 2009. Meanwhile, the economy is expected to continue its deceleration, prompting a growing number -- but still a small minority -- of economists to predict a recession. For investors, the most pressing question is: As events unfold and data becomes available, how and to what will markets react?
Most investment professionals contacted by The Daily Transcript are watching the average American consumer -- whose spending accounts for more than two-thirds of the U.S. economy -- for clues about where the overall stock market is headed.
"I think the jury's still out, but we're starting to see borrowers with higher credit running into trouble," said Bud Leedom, publisher of the Point Loma-based California Stock Report. "It's uncertain where this thing will shake out, but it's going to get worse before it gets better."
Leedom added that he thinks most of the issues investors dealt with in 2007 will continue to weigh on markets and consumer confidence in 2008.
"I don't see how anyone can say the worst is behind us," he said.
Although upbeat about the U.S. economy, Buechler said he has seen ominous signs from consumers, and expects to watch their spending closely in 2008.
"Indicators keep telling me that the consumer is dead," observed Buechler. "I think if you don't see a big dip in retail numbers that's a positive sign."
Still, Buechler doesn't believe the economy will fall into a recession, thanks to a recently passed defense spending bill that mandated more contracts go to U.S. companies, and the boost for U.S.-based exporters provided by the cheaper U.S. dollar.
"I think when everybody steps back a year or two from now they'll realize that the vast majority of this has been emotion."