Where to Put Your Cash in 2008

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Schaeffer's Calls

DJIA: 15,300 (December, 2008)

S&P 500: 1700 (December, 2008)

Earnings Growth: 7%

Asset Allocation: 80% to stocks

LEO GROHOWSKI, Chief Investment Officer, BNY Mellon Wealth Management

Among the stock market strategists BusinessWeek surveyed a year ago, Grohowski came closest to pegging where the Dow, the S&P 500, and the Nasdaq Composite would finish in 2007. He warns that 2008 could be a schizophrenic year for the stock market, as concerns about recession are replaced by fears of rising interest rates and the potential for inflation. "It's likely to be a tale of two halves of the year," he says. Overall, Grohowski is expecting the Dow to finish 2008 some 10% higher. But along the way, he warns, investors will be in for a choppy ride, as uncertainty about the economic outlook fuels "above normal volatility." Grohowski recommends a defensive portfolio. He likes U.S. stocks, because he thinks valuations are reasonable and because there aren't a lot of attractive alternatives. "At this time last year, there was a lot of interest in real estate, commodities, and private equity." With those sectors under pressure, he thinks equities stand to gain. Grohowski thinks growth stocks will outperform their value counterparts and recommends large-caps over small company stocks. His favorite, FCStone Group (FCSX), helps companies hedge their exposure to commodities and so should "capitalize on the volatility we expect."

When it comes to bonds, Grohowski favors municipals, which on an after-tax basis currently yield more than comparable Treasuries. "In almost any tax bracket, it makes sense to buy munis," he says. Later in the year, Grohowski thinks investors will be rewarded for taking more risk. He's expecting financial stocks to rebound. And he thinks international stocks still have room to outperform. "If you combine our expectations for a 2.5% rise in inflation, a 2% increase in GDP [gross domestic product], and 5% earnings growth, that's a pretty friendly backdrop for equities."

Grohowski's Calls

DJIA: 14,800 (December, 2008)

S&P 500: 1675 (December, 2008)

Asset Allocation: 37% in bonds

Favorite Stock: FCStone Group

THOMAS McMANUS, Chief Investment Strategist, Banc of America Securities

McManus is expecting the Dow to decline by 3% in the first half of 2008 before rebounding to finish the year a solid 10% above current levels. While most economists minimize the chances of a recession, McManus puts the odds of an economic downturn at 50/50 or greater. Why? Over the past 40 years, McManus counts eight instances in which the Federal Reserve has embarked on a series of interest rate hikes—the most recent of which ended in June, 2006. Six of those campaigns have resulted in recession, he adds. Whether we're heading for a full-blown recession or a period of slow growth, McManus expects stocks to head up in the second half of 2008. "Stocks usually bottom close to the beginning of a recession. Certainly by the time it's obvious that we're in recession, stocks have already bottomed."

For the coming year, McManus favors large-cap stocks over small-caps, growth over beaten-down value plays, and the stocks of companies with international exposure over those that cater to only the domestic market. He's particularly wary of companies that manufacture and finance consumer discretionary spending: "If there is going to be a recession, it's going to be a consumer-led recession." McManus also likes Treasury Inflation Protected Securities (TIPS), which he thinks should comprise about 15% of a portfolio: "2008 will be a time when investors will need to continue to look for ways to protect against inflation." While TIPS have rallied this year, McManus thinks they're still reasonably valued. He also recommends stashing 10% in either commodities or hedge funds that lack a strong correlation to the U.S. stock and bond markets.

McManus' Calls

JIA: 14,700 (December, 2008)

S&P 500: 1625 (December, 2008)

Asset Allocation: 15% in Treasury Inflation Protected Securities (TIPS), 15% in cash, 10% in commodity or hedge funds

Observation: "2008 will be a zig-zag year, more volatile than 2007"

DAVID BIANCO, Chief U.S. Equity Strategist, UBS Investment Research (UBS)

UBS's chief U.S. equity strategist expects economic growth to slow next year, to about 2%. But he believes the odds of a recession are less than 50/50, thanks to the Federal Reserve, which he expects to cut interest rates enough to provide relief to banks and, to a lesser extent, consumers. By yearend, Bianco sees economic growth heading modestly higher and the Dow at 15,250, or 14% above today's level. With the risks of a recession and a severe credit crisis still high now, Bianco is advising caution. He favors U.S. over foreign stocks, primarily because he expects growth abroad to slow more sharply than at home.

He's looking for U.S. corporations to post relatively healthy earnings growth of 10% in 2008, largely on the strength of U.S. exports and continued demand for high-technology products. For that reason, he favors large-cap companies with a global reach, which stand to benefit from exports. He's steering clear of U.S. corporate and high-yield bonds due to credit concerns and instead recommends British, euro zone, and Australian government bonds, which are cheaper than U.S. Treasuries. As the pace of bank write-offs slows and the threat of a recession recedes, Bianco says investors need to be ready to shift gears by buying distressed assets, such as the stocks of U.S. banks.

Bianco's Calls

DJIA: 15,250 (December, 2008)

S&P 500: 1700 (December, 2008)

Favorite Stock: Oracle

Observation: "2008 will bring clarity on U.S. economic health and the sustainability of robust earnings growth that the S&P 500 has generated in recent years"