2007 Stock Market Forecast

Each year at this time I offer up my forecasts for various investments for the year ahead. I’ll kick off my 2007 forecasts today with the stock market. In specific, I’m writing about general market averages such as the Dow Jones Industrial Average and the S&P indices.

What happens next year in the stock market will largely be determined by the following factors:

Interest rates–One camp says they will go down because the U.S. economy is slowing so quickly. The other camp says interest rates will remain unchanged, maybe even rise, to protect the value of the U.S. dollar on world currency markets.

Housing–I’ve written for over a year now about how today’s young analysts and economist don’t understand the impact a negative housing market will have on the economy. In specific, consumers don’t feel good about spending when their house values are going down. And the reality is quite simple: Too many houses were sold in 2005 without enough equity (down payments below 10%). At this point consumers who bought in the heat of 2005 could actually have no or negative equity. How can that not affect consumer spending and the economy?

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U.S. Dollar–A fast falling greenback is not a good thing for the stock market. Why? Because foreigners don’t like to invest in a country (they don’t like to buy their stocks, real estate, and bonds) when that country’s currency is falling in value. Depending on how bad the currency situation gets in 2007, interest rates might stay high in a sheer attempt to keep foreigners investing in the U.S.

Economy–It’s soft and getting softer every day. And why wouldn’t the economy get softer? The Fed’s discount rate today is sharply higher than in 2004. Housing is lower than 2005. The auto industry has its own problems. Consumers are worried about their personal finances and that’s bad for the economy.

A couple of years ago, before Greenspan retired, we published a special research report called: “Revenge to Riches: Greenspan’s Secret Plan.” In that report we wrote about how the real economic plan of Greenspan et al was to slowly lower the U.S. dollar against other world currencies in an effort to flatten out the U.S. trade deficit, while tactically damaging the economies of other countries.

I continue to believe in that plan, because I believe a cheaper U.S. dollar is good for Americans. Hence, my opinion is that unless the U.S. dollar starts to collapse on world currency markets, interest rates in the U.S. will slowly decline in an effort to boost the economy. I’m still concerned about deflation, and if it starts to rear its ugly head, the Fed will drop rates quickly to spur spending and inflation.

The year 2007 won’t be a big one for the stock market. The big averages like the Dow and the S&P have already discounted future interest rate cuts ahead. While I continue to believe the bear market that started in the year 2000 in stocks is still intact, the Fed has done a great job fighting it. Unfortunately, in the end the forces of nature always win over mans’ efforts.

The only stock market I’m bullish on for 2007 is the Toronto Stock Exchange (Canada’s equivalent to the NYSE). I believe the rally in precious metals will continue in 2007 and thus this precious metal and resource heavy market should be one of the world’s biggest gainers in 2007… just like it was in 2006… and giving more validity to the proverb the trend is your friend.