your portfolio fits within the larger economy
Like the tip of an iceberg, your investments are a small part of a vast whole; their performance is intertwined with fundamental elements of the economy. Knowing which way the winds are likely to blow regarding these macroeconomic factors can help you make smart decisions. So how are the winds blowing? Experts say 2007 will start strong and may end a bit weaker, but overall it’s shaping up to be a good year for investors.
Here’s an overview of some key factors:
Interest Rates “The Federal Reserve Board has been pretty consistent in keeping its eye on inflation first and foremost,” says Greg McBride, senior financial analyst for Bankrate.com. With the risk in check, the Fed is likely to leave rates at 5.25% for several months, he adds. Through last summer, the had raised short-term interest rates 17 times in two years to keep a lid on inflation.
A slowing economy in the second half of the year could further ease inflation fears, which might prompt the Fed to cut rates in order to stimulate spending, says Zoltan Pozsar, an economist at Moody’s Economy.com. He expects that long-term rates, which the Fed does not directly control, will stay flat or fall this year, which could help nudge home sales forward.
Falling rates are great for long-term bonds, says Leroy Tanker, a certified financial planner with Freedom Financial Services in Atlanta. Rising long-term interest rates cut into the value of bond portfolios by making newly issued long-term bonds more attractive than existing long-term bonds. Falling rates have the opposite effect, he says.
Consumer Spending Housing and automobile sales are slumping, but strong consumer spending–fueled by end-of-year bonuses and cash from home equity loans–will continue to keep consumption strong in the first half of the year, according to Pozsar. He says that by the second half, spending growth should slow to 2.4%, down from 3.2% last year. “That’s healthy, but not as strong as it used to be,” he says.
Corporate Profits Several years of strong performance have proved a boon to investors. Pozsar says that while profit margins remain at record highs, he expects them to fall back just a bit this year. Corporate profits are closely linked to consumer spending, Tanker notes. “We have to have strong consumer spending to give us strong corporate profits and to produce a good environment for equities,” he says. “Corporate profits are looking moderately strong this year.”
The Dollar The greenback, already weak compared with the euro, will depreciate against Asian currencies as China strengthens the yuan by letting it appreciate, according to Pozsar. That’s good news for investors who own international stocks, says Tanker. “International equities are denominated in foreign currency, and if the dollar is weak, foreign currency is worth more.”
With the Dow at an all-time high and some sectors seemingly about to burst, it’s an unhappy time for bargain hunters–almost everything seems pricey. But don’t fret, because as CNBC’s Mad Money host Jim Cramer says, there’s always a bull market