Investing: Reading tea leaves for 2008

Making economic predictions can be a tricky business, said James Miller in the Chicago Tribune. Last year, economists’ consensus prediction was for a “soft landing” by a cooling economy that would nevertheless see inflation-adjusted gross domestic product grow by 2.6 percent. It didn’t quite work out that way, as GDP ticked up merely 2.2 percent, and both credit markets and the stock market hit the rocks. In the coming year, stock investors will need to be particularly attuned to the ramifications of a possible recession, according to Merril Lynch economist David Rosenberg. While financial and real-estate firms are currently being hardest hit, “the stock market hasn’t fully factored in the prospect of deepening profit damage for companies in economically sensitive cyclical sectors.”

Investors have been known to study some oddball indicators in an attempt to guess the future, said Russ Wiles in The Arizona Republic. “According to the ‘presidential-election cycle’ theory, it’s smart to invest during election years and years such as 2007 that precede an election year.” The Super Bowl theory contends that stocks rise in years when teams from the old American Football League lose. (So root against the New England Patriots.) Yet another Wall Street old wives’ tale claims that the market should stay strong because 2008 ends with an 8. “The market hasn’t dropped in such a year since 1828.”

But recession is by no means a sure thing, said Jon Birger in Fortune,

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and savvy investors can profit even in a down year. “We’ll say this for

the U.S. economy: It can take a punch.” In fact, it expanded by 3.8 percent and 4.9 percent in the second and third quarters. What gives? “The short answer is globalization.” Growth in developing nations, not to mention a weak dollar, has opened doors for U.S. companies overseas. “We think the U.S. economy will slow in 2008 but narrowly miss an outright recession.” The stock market, meanwhile, is likely to “bounce around” and end 2008 with single-digit returns. Our top picks for individual stocks include video game maker Electronic Arts and biotech firm Genentech. In retail, Dick’s Sporting Goods looks like an “emerging category killer.” Merrill Lynch, which took a hit in 2007, now seems like a bargain. Berkshire Hathaway, meanwhile, is sure to thrive for one simple reason: “Warren Buffett knows how to exploit panics.”