Russell optimistic on US economy

While there is currently plenty of gloom about the outlook for the US economy, the Russell Investment Group’s US chief investment strategist Ernie Ankrim is predicting the US will dodge recession and enjoy a significant gain in the S&P 500 by the end of 2008.

In an analysis released this week, Ankrim claims 2008 will be a year of two halves — a rocky first half with continuing sub-prime related uncertainty, but finishing on a brighter note after positive market movements later in the year.

Ankrim has provided an eight-part prediction for 2008, which he has dubbed ‘Eight for 2008’, which is as follows:

1) From meltdown to liquidity — Continued uncertainty and sub-prime write-offs early in 2008 will likely give way to more transparency and, finally, liquidity for structured investments. Some terrible pain aside, the markets should celebrate this development and the removal of uncertainty as we head into the second half of the year.

2) ‘The sun will come out, tomorrow’ — Optimistic outlooks for the US economy in 2009 should cause earnings multiples on equities to rise ahead of the anticipated positive developments. This would cause equity returns to approach the mid-to upper teens even while 2008 earnings grow at a slow pace.

3) ‘Big stocks don’t cry’ (with apologies to the Four Seasons) — Large, internationally diversified companies should continue to outperform their smaller, domestically-oriented siblings in the US equity market for the second year in a row.

4) Uncle Sam ‘Cowboys Up’ — Better trade numbers, continuing slower domestic growth, international investment in-flows and expected monetary and fiscal restraint should put an end, for now, to US dollar declines.

5) ‘That kid down the street sure is growing’ — Tighter monetary policies begin to take their toll on developed economies (US and non-US). While this global slowdown will take some steam out of developing economies — their growth rates will likely slow only slightly.

6) Inflation is not an issue — Commodity prices are likely to remain high, but both commodity and broader US consumer inflation should remain contained. Although some commodities will show modest declines (e.g, oil will stay under $100 for the year), few if any high costs will be passed on to the retail level as global competition continues to limit firms’ pricing power.

7) This ‘dead cat’ doesn’t bounce — US housing prices should continue to decline through the first half of 2008. Although the size of the declines will moderate heading into 2009, with few exceptions, house prices show no signs of rising.

8) We make it up on volume — While US house prices remain weak, and despite continuing financing problems in early 2008, homebuilder stocks could bounce back before the year is over. In the US, declines in the price for land, material and labour would allow the market to see the end of a three-year tunnel for this group and valuations could improve dramatically by year-end.