Market Outlook: 12-19-07

Robert Hsu, December 19, 2007

There has been no holiday cheer on Wall Street this week -- U.S. stocks experienced the steepest weekly drop in a month. Some of the losses may have been due to the recent CPI announcement. The consumer price index jumped 0.8% in November, the most since September 2005. Consumer prices increased 4.3% in the 12 months up until November, the most since June 2006. Accelerated inflation raised concerns that higher prices will curb consumer spending and give the Federal Reserve less room to cut interest rates. At a time when corporate earnings are slowing, the stock market will have a tough time climbing higher without more rate cuts from the Fed.

The S&P 500 lost 2.4% last week, trimming its yearly gain to a mere 3.5%. By comparison, Asian markets have done far better this year. Although the MSCI Asia Pacific Index declined 4.2% to 157.56 in its worst weekly loss since August 17, most Asian stock markets outside of Japan have performed well in 2007. Stock markets in Hong Kong, Shanghai, Russia and India are all up well over 30% year-to-date. Think these gains are impressive? Join Asia Edge today to learn the best ways to profit in Asia!

I expect the sharp global stock market sell-off to pause over the next two weeks until year-end. My gut feeling is that this week's selling due to the Fed's decision to incrementally lower interest rates is overdone for now. As the market stabilizes, I'm expecting sideways action in the traditionally thin holiday week from now until the New Year.

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