2008 Could See Volatility of 2007

Funds even normally safe money market funds invested in products based on mortgages that were bundled and sold off to investors. But a weakening housing market made some of the assets underlying those investments shaky, as some homeowners found it impossible to make their mortgage payments.

Q. Funds that invested in areas such as emerging markets like China and other overseas economies were strong in 2007. How will such funds fare in 2008?

A. "If history repeats itself, then emerging market investors are due for big disappointment" because such spectacular growth is hard to sustain long-term, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago, which oversees assets of more than $55 billion. "That's probably the most gnawing question keeping me awake at night."

Q. What kind of change might investors see in 2008 from 2007?

A. "I think that this global market isn't quite as disconnected as investors have hoped so I think that Europe weakens and that the European Central Bank will actually find themselves behind the eight ball and so the dollar will strengthen on the back of European rate cuts," said Ablin.

Q. Will sector-specific funds that showed strength in 2007 continue apace in 2008?

A. "The sectors that were the strongest in 2007 could be among the weakest in 2008 on the theory that we have recessionary tendencies in the world's largest economy and Europe and Japan aren't that far behind," said Joe Battipaglia, market strategist for the private client group at Stifel, Nicolaus & Co., which has $32 billion in client assets. He contends a slowdown in the U.S. economy would dampen demand for commodities such as oil and that a correction in emerging-market stock markets like China is due.

Q. Will large-cap funds continue to outrun small-cap funds?

A. "I think that will continue because these companies do tend to be more globally diversified and can be more of a safe-haven than small caps," said Battipaglia.