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Financial outlook: Rocky, but upbeat

- Alan Lavine and Gail Liberman

The word, "Recession," keeps surfacing.

So what's in store for your mutual funds next year?

Bob Doll, global chief investment officer with BlackRock, New York, says the housing industry has been one of the worst-performing sectors of the stock market. Consumer spending suffers when people don't buy homes. Retail sales have been falling.

However, energy, technology and telecommunication stocks should continue to perform well.

Doll expects slower economic growth next year. But global economic growth is strong. That, coupled with a weak U.S. dollar and lower U.S. interest rates, should help U.S. exports.

"Despite concerns over economic growth, (stock) markets have continued to grind higher and we believe that the bull market should continue," Doll said. "An environment of Fed easing and weaker dollar should translate into continued price appreciation, provided that corporate earnings do not implode."

Other money managers are less optimistic about U.S. stocks, but caution about making decisions based on short-term stock performance trends.

"We believe that U.S. economic growth will falter in the months ahead," said John Eichel, a portfolio manager with American Century Investments. This, he says, should provide a favorable environment for fixed income securities, such as Treasuries and high-quality government bonds.

But he also cautioned that the Fed faces a challenge in shoring up confidence in the financial markets without igniting inflation or reflating speculative bubbles.

"With the Fed's focus beginning to shift away from inflation, investors may want to add an inflation hedge in the bond portion of their investment portfolios," he suggests.

Jeremy Siegel, finance professor at University of Pennsylvania's Wharton School of Finance, believes the worst is over regarding the credit crunch and problems in the subprime loan market.

"Everyone is going to say that there is going to be a big bomb and there is going to be a hedge fund that is going to go under," he reported recently in Wharton's online business journal. "We haven't heard of any big bombs and are slowly returning to normal."

Siegel believes we are in a mid-economic cycle slowdown similar to 1995. After the Fed cut rates dramatically in 1994, there was a big economic slowdown, but no recession. Our economy, he says, is suffering from fallout from a rise in rates and excess when rates are low for a long time.

"I'm on the optimistic side," he said. "But I think we are going to see 1 percent of 2 percent real growth. Housing is still bad and will remain bad. But we've gone through a year of bad housing and managed to stay above water. I think that will continue in 2008--and then look better towards mid-year and further beyond."

Siegel pegs the probability of a recession at 25 percent. Recently, former Fed Chairman Alan Greenspan pegged it at less than 50 percent.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.

To read more columns, please visit the column archive.

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