Money Magazine 2008 outlook: Investing

By Janice Revell, Money Magazine senior writer

The sluggish economy will be behind the expected surge in market turbulence. "When the economy slows down, there is more uncertainty," says Stuart Freeman, chief equity strategist at A.G. Edwards. "So people react much more strongly to news that otherwise would not have a big impact."

But even though stock prices will jump around more, they're still expected to rise in the coming year. The combination of decent if unspectacular earnings growth - about 7.7 percent - and a slight decline in the average price-to-earnings ratio next year should translate to an overall gain of about 5 percent in Standard & Poor's 500 index for 2008.

But to cash in, you'll need to be picky about the kind of stocks you buy. Most pros believe that large-cap growth stocks - shares of companies with earnings growing faster than the market average - are primed to outperform in 2008.

One reason: A weaker U.S. dollar boosts profits on big companies' foreign sales, allowing them to grow even if the U.S. economy flags.

This year such stocks outperformed their value counterparts - stocks that look inexpensive based on their earnings - for the first time in several years. And analysts say big growth stocks will keep their edge throughout 2008.

"Once that shift happens, it doesn't switch back overnight," says Stephen Wood, senior portfolio strategist at Russell Investment Group.

As for bonds, favor such high-quality issues as Treasuries and highly rated corporate bonds over riskier "junk" bonds. Lower-rated issues have a higher risk of default in a slow-go economy and thus a greater chance that their prices will slide.

The wild card: Strong overseas sales are fueling much of the profit growth in the large company growth stocks that are expected to excel this year. But if a foreign version of the U.S. credit crunch and housing crises were to cause economic growth outside the U.S. to sag, it could erode the earnings of U.S. large-caps and push down their stock prices.

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