Goodbye 2007, Hello 2008
First of all, 2007 was certainly not a year in which we could label as “predictable.” Although it does not surprise us that the TSX will finish the year in positive territory, we would have never predicted the path that got us here. 2007 was a year of “two halves” where the first half was a continuation of the positive growth story we had witnessed since 2002, while the second half can simply be labelled as one with little transparency and thus predictability or direction.
Although we continue to work our way through our expectations for 2008, here are some preliminary thoughts. First and foremost, we expect the credit issues that have dominated the attention of the markets since July will continue not only for the first quarter but quite possibly well into the second quarter of next year. For this reason the likelihood of any significant, sustainable rallies for the TSX in the first half of 2008 is low as the market will continue to digest the implications of tight/illiquid credit markets and the economic effects that may follow. If a rally does occur sooner, it may come from resources if growth from the emerging markets is maintained, but we don’t expect U.S. economic growth to be the catalyst for such an event.
Another expectation is that the decline of the U.S. housing market will continue in 2008 and resets of sub prime mortgages will continue to be problematic. Such a scenario will prolong discussion concerning the health of the U.S. consumer and thus the outlook for the U.S. economy which is predominantly driven by domestic consumption. Any discussion of slower U.S. growth will leave investors wondering if such a slow down will follow to some degree in Canada Corporate earnings expectations for 2008 will also likely come under review in both Canada and the U.S. depending on the extent of the U.S. slowdown. We would not be surprised to see guidance numbers changed in January/February when fourth quarter earnings are announced.
After reading the comments above, one could easily conclude that we are very cautious about the first half of 2008. Unfortunately, this is the reality we face and it is for that reason we have been encouraging investors to diversify their portfolios into more defensive positions until the U.S. economic picture becomes more transparent. 2008 will not be a year without challenges; therefore we encourage investors to contact their Investment Executive to discuss their portfolio positioning for the year ahead.
- Gareth Watson, CFA – Associate Director, Portfolio, Advisory Group