The economy may be in a slowdown mode, thanks to the housing market, but indicators point to continued growth with another strong year for mergers and acquisitions through 2007, according to analysts.
The observation came during a Standard & Poor's conference call yesterday, when analysts assessed the 2007 economy.
David Wyss, S&P's chief economist, said indicators point to an economic slowdown with consumer spending continuing to buoy the economy, despite weakness in the housing sector.
Corporations have plenty of cash on hand, he added, with profits looking strong and interest rates remaining low.
Mr. Wyss continued that the economy is expected to re-accelerate in 2008 as the housing market comes out of its slump.
On the topic of mergers and acquisitions, Sam Stovall, chief investment strategist, said that during the past 12 months there was more than $12 trillion in merger and acquisition activity–equal to about half the merger and acquisition activity of the past three years.
For management, he said, this means added pressure to do a good job. The alternative is that new management can be found through merger or acquisition.
"It also implies that corporations believe their share prices are undervalued with a lot of the deals being transacted with cash or with debt," he noted.
Although he did not have a target value for 2007, he said it could turn out to be another good year as managers feel confident in pursuing growth in their business sector.
Mr. Stovall said the S&P 500 is expected to post an 8 percent price gain in 2007, with an economic meltdown unlikely.
There also is a 25 percent chance of recession in 2007, he said. Oil prices will remain steady at a range between $55 bbl and $65 bbl, averaging $65 bbl for 2007. If oil prices take a dramatic turn upward to $85 bbl, Mr. Stovall noted, the result could be a further weakening of the housing market, reduced consumer spending and an increased possibility of a recession.
Despite these fears, he said, while 2007 might not be a great year, "we think it will be a good year."
Looking at international prospects, Alec Young, international equity market strategist for S&P, said concerns for a hard landing for the U.S. economy have eased, which will mean more international investment in the United States.
Europe, China and India are expected to be above GDP trend growth next year–which is above 2 percent–with China coming in at 10 percent growth and India between 7- and 8 percent growth.
Lower oil prices are helping overseas growth, and around the world, interest rates remain low, with 10-year bond yields ranging from 5.5 percent in Australia down to 1.7 percent in Japan, Mr. Young said.
Mr. Stovall said the strongest sectors are financial and industrial with overweight recommendations; both have good earnings prospects with less risk in those sectors because of high S&P earning and dividend quality rankings.
A replay of the conference is available at 866-403-7095 for the next 10 days.
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