2008 Could See Volatility of 2007

The concerns about slowing economies, a weakening U.S. consumer and further tightness in the credit markets are likely to dog investors at least early on in 2008, observers say. While it is impossible to say with any certainty what will happen, few expect that the bumpy ride investors unwittingly began in mid-2007 will soon end.

A few Wall Street veterans agreed to weigh in with some of their predictions for 2008.

Q. Will the U.S. fall into recession?

A. "Right now, we've upped the odds," said Quincy Krosby, chief investment strategist at the Hartford, which oversees about $330 billion in assets. "We've always thought that the U.S. would be able to narrowly skirt a recession. For us the key is the employment data."

She contends the economy sits at a crossroads and whether a recession occurs will depend on whether unemployment remains low and whether the housing market can bottom out. She said the Federal Reserve will also need to continue to lower interest rates.

Q. Growth funds, which invest stocks likely to increase earnings and revenue but often don't pay big dividends like so-called value stocks, did well in 2007. Will that continue?

A. "We expect to see large cap growth outperform," said Krosby. "It's very difficult for investors to realize that a shift has gone on. That shift took place a number of months ago when we saw the baton go from small-cap to large-cap and now to large-cap growth. Large-caps come into their own during (economic) slowdowns."

Q. What will come of financial instruments such as mortgage-back securities made infamous in 2007 when they hurt the performance of financial stock funds?

A. "You know Wall Street and the geniuses who created this they're going to create something else in its stead," said Krosby. "The demand was fostered by a global demand for yield. This is why it popped up all over the world."