The problem is 2007. The solution -- for investors -- is a specific kind of blue-chip stock: large-market capitalization, predictably strong earnings growth, a reputation as a safe haven in a risky market, and strong exposure to long-term global growth trends.
In this column, I'll explain why and, as part of my annual update of my long-term "50 Best Stocks in the World" portfolio, give you five names from that list that fit the bill right now. I'll be adding two of them to my 12- to 18-month Jubak's Picks portfolio as well.
I laid out some of the reasons that 2007 is such a problem for investors in my Sept. 15 column, but conveniently the International Monetary Fund (IMF) provided a concise summary of the high degree of uncertainty surrounding next year's economic results in its semiannual outlook on the global economy, released on Sept. 13.
Here's the most likely scenario for 2007, according to the IMF. Thanks to strong growth from China (projected at 10% in 2007 after 10% growth in 2006) and India (7.3% in 2007 after 8.3% in 2006), the global economy is likely to grow 4.9% in 2007. That would be just a slight dip from the 5.1% projected growth in 2006 -- certainly good news for investors globally.
The developed economies don't fare quite as well, but growth there still isn't anything to worry about. Growth in the U.S. economy, the IMF projects, will slow to 2.9% in 2007 from 3.4% in 2006. Europe will slow more rapidly, to 2% in 2007 from 2.4% in 2006, as will Japan, to 2.1% in 2007 from 2.7% in 2006.
Still, growth under this most likely scenario isn't anything to worry about. It's certainly strong enough to keep corporate earnings perking along just fine.
The spoilers: houses and oilBut then the IMF had to go and spoil the party by listing all the things that could go wrong. The souring U.S. real estate market could go from bad to worse, taking U.S. economic growth with it.
How bad does the housing slump have to get before it sends economic growth into a tailspin? A 5% decline in national average prices could push economic growth down 0.3 percentage points in 2007, Merrill Lynch calculates. That would take U.S. growth down to 2.6% in 2007. (Average U.S. housing prices were still inching upward over the summer, although that trend looks likely to falter soon.)
And there are the still unsolved, linked problems of the U.S. trade deficit, a weak dollar and U.S. inflation rates. If the Federal Reserve had to raise interest rates to defend the dollar (a potential danger serious enough for the IMF to give it special mention) or to keep inflation down (if the recent fall in energy prices should turn out to be just temporary, say), it would take another bite out of not just U.S. but world economic growth, the IMF points out.
All the uncertainty isn't on the negative side, however. Lower gasoline prices, if they stick around for a while, could well boost consumer spending a full percentage point in 2007. J.P. Morgan Chase projects that gas will hit $2.30 a gallon soon, sending fourth-quarter economic growth in the United States as high as 3.7%. Most economists are now projecting 3% growth.
So economic growth in the United States in 2007 will be down modestly, down significantly, or up from 2006. Pick your poison.
Havens that headwinds can't rockMacroeconomic trends aren't everything when it comes to investing, of course, but I do like to have the wind at my back when I put my money in the market. Right now I can't tell what from which quarter the wind is blowing or how hard the blasts are likely to be.
Which is why I favor a core of big-cap growth stocks for my portfolio in 2007. These stocks will churn out double-digit earnings if the economy slows slightly. Earnings will hold up well even if the U.S. slowdown is bigger than expected, since these companies do business in so many economies that they can often balance slower growth here with faster growth there.
And these stocks actually get an extra performance kick from volatility. Because they're seen as safe havens, money flows into these issues when an up-and-down market scares money out of more-volatile sectors.