Where to Put Your Cash in 2008

To help you invest your money profitably in a rough year, BusinessWeek polled seven stock market analysts. Here's their best advice:

WILLIAM GREINER, Chief Investment Officer, UMB Financial

Greiner's crystal ball has a strong track record, having landed him at or close to the top of the list of 80-plus stock market strategists BusinessWeek has polled in past years. For 2008, Greiner says stocks will fall in the first half of the year as the economy slows. But after that, Greiner expects a combination of low stock valuations and lower interest rates to push the Dow up some 8% over today's levels. Moreover, he notes, "the market has a tradition of rallying pretty hard in the second half of a Presidential election year." Greiner favors companies that manufacture products consumers cannot do without, such as food and drugs. He expects such companies to deliver strong profit gains—of some 8% in 2007 and 10% in 2008—even as corporate bottom lines elsewhere stagnate. His favorite stock, Starbucks (SBUX), trades at about 23 times earnings—or "its cheapest level ever."

Greiner's Calls

DJIA: 14,400 (December, 2008)

S&P 500: 1520 (December, 2008)

Favorite Stock: Starbucks

Observation: "It will be much more challenging to make money"

TOBIAS LEVKOVICH, Chief U.S. Equity Strategist, Citigroup (C)

Citigroup's U.S. stock strategist is advising clients to buy beaten-down financial and retailing stocks and steer clear of stocks that have seen big run-ups. Of course, Levkovich's call amounts to good, old-fashioned investment sense ("buy low, sell high"). But there's no guarantee his timing is right. "Markets don't ring bells at the top or bottom," he replies. "If you wait, you will miss out." Levkovich believes bank earnings are likely to surpass analysts' ultralow expectations for next year. Why? A series of interest-rate cuts from the Fed, extending into 2008, will allow banks to reduce the rates they pay on deposits and repair damaged balance sheets. Meanwhile, he predicts retailers will benefit from healthy consumer spending, fueled by continued job growth. By Levkovich's calculations, stocks are at bargain levels seen in only 90 of the past 550 months. "In every single instance," he adds, "the markets were higher 12 months later." But while Levkovich expects the Standard & Poor's 500-stock index to rise 18% by midyear, he's looking for investors to give back some of those gains in the second half of the year, as uncertainty sets in over the U.S. Presidential election and rising wages squeeze U.S. corporate profits.

Levkovich's Calls

DJIA: 15,100 (December, 2008)

S&P 500: 1675 (December, 2008)

Earnings: expects a rise of 5.2%

Recommendation: Buy financial stocks

JASON TRENNERT, Chief Investment Strategist, Strategas Research Partners

Rated one of the best market strategists by Institutional Investor magazine in four of the past five years, Trennert has a strong following among the sophisticated investors who run pensions and endowments. His recommendation for 2008 is to stick with U.S. stocks. With corporate balance sheets strong and the U.S. unemployment rate low, Trennert figures the odds of a recession are low. He expects the Federal Reserve to cut the Federal Funds rate from 4.25% to 3.5% by midyear—averting a major credit crunch and fueling stock gains. At 15 times 2008 earnings projections, Trennert argues U.S. stocks are a good buy in comparison with bonds: The ten-year Treasury bond's 4.2% yield equates to a price-earnings ratio of 25. Trennert also sees more upside in U.S. stocks than in their international counterparts. The reason: If European central banks cut interest rates in 2008 to combat weakening economies, those currencies will depreciate against the dollar, reducing returns on European stocks when translated into dollars.

Trennert's Calls

DJIA: 15,150 (December, 2008)

S&P 500: 1680 (December, 2008)

Favorite Sector: Technology

Observation: Tech has the most cash on its balance sheet and has the most to gain from a weakening dollar.

BERNIE SCHAEFFER, Chairman, Schaeffer's Investment Research

Schaeffer—a past winner of BusinessWeek's annual stock market forecasting contest—remains optimistic about the outlook for stocks in 2008. He expects a series of "aggressive" interest-rate cuts by the Federal Reserve to bolster consumer spending, economic growth, and stock prices next year, and for a weaker dollar to inflate the overseas earnings of multinational companies.

Schaeffer also scrutinizes various technical indicators, most of which, he believes, are currently flashing positive signals. For instance, he cites indicators of negative investor sentiment which, counterintuitively, are positive for stocks, since they signal there's a lot of money on the sidelines waiting to move into stocks upon good news. Among them: analysts' expectations for corporate earnings, which in recent weeks have "fallen off a cliff" and a significant level of short interest, or bets against stock price gains. Schaeffer also thinks the market will continue to benefit from long-term trends. He points to the growth of hedge funds and the increasing prevalence of short-selling, the latter of which has "kept stock valuations from getting too far out of line." Hedge fund short-selling has also "created selling pressure in the market on an ongoing basis," leaving stocks less vulnerable to steep and rapid sell-offs.