Five Themes You Need to Know for 2008

By Kevin Depew  JAN 03, 2008 12:17 PM

What you need to know (and what it means)!


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1.  Deflation

If 2007 was the year of inflation worries and stagflation nightmares, 2008 will be the year of deflation. 

2.  Consumer Recession

It hasn't happened since 1991, but after 16 years prepare for a "consumer recession" to make headlines. 

3.  The Coming Cleansing

Granted, a common theme for every new year is "getting in shape," and "kicking vices," etc. but I like the metaphor of this week's cover story in Time Out New York, "Get Clean!"

4.  The Rush to Disassociate

Many social trends frequently begin in the creative class and work their way out to "regular" society, so the story below seemed interesting, a comedian taking heat for making money.

Click to enlarge

If the 90s were about wealth, accumulation and consumption, 2008 will continue the mean reversion toward something altogether more austere, if not more sensible.  Debt reduction and the rejection of (and guilt projection toward) materialism will continue what began in 2006 and 2007 as meditations on not just doing more with less, but doing less... period. 

5.  So, What to Do?

One thing I must make clear is that the economy is not the stock market.  Inflation, stagflation, deflation, recession, depression, these are all interesting concepts and economic conditions, but the stock market is something else altogether; probably the reason economists seem to make such poor stock market forecasters.  

So the question now is, what do we do in 2008?  Where will we find the winners and losers? 

First, the areas I believe we want to avoid remain the Financials and Consumer Discretionary sectors.  Both sectors as we enter 2008 are deeply oversold in technical terms but, despite the potential for near-term rallies, the relative outperformance longer-term will come from other sectors.

What about Energy?  As we noted in the first theme on Deflation, this sector has benefited for many years now from the near-unwavering upward movement in crude oil prices.  It's now the officially "crowded" sectors.  When we first began writing about the Energy sector in 2002 it carried a paltry 6% weighting in the S&P 500 .  Over the past five years it has more than doubled and now comprises nearly a 13% weighting in the S&P 500

This does not mean the secular trends benefiting Energy and Basic Materials is over.  After all, in 1980 Energy and Basic Materials together made up nearly 40% of the S&P 500's weighting; today they make up a little less than half that.  It just means we may need to take a break from their outperformance for a little while. 

As 2007 marked the conclusion of the long-term outperformance cycle for small caps, 2008 I believe will mark a continued turn toward large cap and defensive sectors.  Among the ones I like are Healthcare and Consumer Staples.  

Below are 7 stocks to consider from those two sectors:

CVS Corp. (CVS)
Groupe Danone, ADR (GDNNY)
Hologic (HOLX)
Magellan Health Services, Inc. (MGLN)
Pediatrix Medical Group (PDX)
Procter & Gamble (PG)
Reynolds American (RAI)

No positions in stocks mentioned.

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