Investors are facing numerous crosscurrents as they try to parse the direction of the market for the balance of 2008. When all's said and done, I tip my hat to the bulls for the last four months of the year.
On the inflation front, the slowdown in global economic growth has finally hampered the rise in raw materials. Crude oil has fallen precipitously in the last few months, which has proven to be a boon for airline stocks and other big users of energy. As speculators continue to back away from energies, prices should continue dropping, which should take considerable pressure off domestic equities.
Look to the Fed to take advantage of the lower prices. With less inflation expectations, Treasuries now have a much more attractive real yield. And there is less pressure to raise rates, as energy and other commodities fall in price.
The upcoming election is another source of angst. It seems that the race to the presidency will be closer than anyone expected. Most view a political change as a positive. I expect Obama's economic agenda to drift in a more centrist direction. No one wants to step into the Oval Office with bigger problems than we already have.
Woes in the housing markets will be tougher to solve. Recent interest in the debt of Fannie Mae (FNM) and Freddie Mac (FRE) are signs that mortgage securities shouldn't be completely written off, but there is considerable inventory issues in some of the largest housing markets. I see these problems ebbing, but not disappearing, for another year.
