Top Market Myths of 2007

2007 had the feel of a bad year in a lot of ways, didn't it? Yet, looking back, on the whole it turned out pretty darn good. Global stocks are up nicely for the year and economies across the globe continued their expansion. True, credit and housing woes—particularly in the US—have lasted longer than expected. But even those haven't proved enough to sink the ship.

Some of these problems could turn out to be very real in the future. In fact, some of these problems ARE real today. But the truth is they weren't enough to sink the stock markets or the economy—and that's what's worth focusing on.

It was a year of anticipation. Over and again we heard pundits tell us, "Just wait, it's coming!" Recession is on its way, so is inflation, so are defaulting consumers, and so on. But they didn't happen in 2007. Economists are just going to have to wait another year, if these things come at all.

Here's a look back at the top market myths of 2007.

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10. The New Congress Will Wreak Havoc on Markets

With the Democratic sweep of Congress in November 2006, many believed 2007 would be the year of big new legislation helmed by the new leadership. In fact, all we can really say for the 2007 Congress is that it spewed a lot of hot air.

A Political Punch, May 2007

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9. Inflation Will Run Rampant

Leading up to 2007, many economists had high inflation on the agenda. In fact, worrying over inflation was persistent throughout the year. But this too turned out to be another of the "it's coming, just wait!" fallacies. 2007 inflation was benign.

Talk is Cheap, June, 2007

Kaizen! June, 2007

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8. Euphoric Sentiment Will Cause an Asset Bubble

In retrospect, this one just seems crazy. Particularly in the early part of 2007, there was legitimate talk of euphoric sentiment raging through stock markets, inevitably leading to a new stock market bubble. This turned out to be not even remotely true. At best, forecasters remained tepid, with mildly positive predictions for the economy and stocks. But mostly, recession talk and fears of sinking earnings kept expectations muted.

Contronym Investing, June 2007

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7. Foreign Creditors Are Going to Buy America!

As sovereign wealth funds and foreign investors scooped up US assets, many began to fear the US was being propped up by outsiders. We're not even sure why folks would balk at high demand for US assets in the first place. On balance foreign investment helped strengthen US Financials when it was needed—a wonderful example of interconnected global capital markets functioning for the good. Also, let us not forget the US invests all over the world and in gigantic proportions.

Propped Up, December, 2007

A Million a Minute, December, 2007

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6. US Consumers Are Finally Tapped Out

Persistent talk of "weary" US consumers on the brink again turned out erroneous. Consumer spending gained nicely for the year as incomes at all levels rose markedly, and US household net worth continued its upward march.

Feel the Flow, December, 2007

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5. High Energy Prices will Crush the Economy

Oil and natural gas prices have been high for some years now. All the while, stocks have moved up and the same for GDP. High energy prices simply didn't have the power to prevent stocks from moving up this year. We see high oil prices as an effect of economic strength, not a cause of economic gloom.

Is Oil Finally Too High? October, 2007

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4. The Weak US Dollar Will Smack the Global Economy and Stocks

The dollar's fall was one of the top financial headlines of 2007. But after a late year rally, the dollar's decline appears barely noteworthy today.

What Dollar Story? December, 2007

So Goes Jay-Z, November, 2007

Currencies: Dollar Doldrums Don't Mean Diddly for Stocks, September, 2007

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3. Credit Crisis Won't Be Contained to Financials

Many believed that difficulties in credit markets in the second half of the year would seep into the broader economy. Didn't happen in 2007. Consumer spending remained solid and earnings outside Financials were good even in the most recent quarter.

We continue to believe today's credit problems have more to do with an illiquid market for securities based on debt (such as CDOs and MBSs) rather than imperilment of the underlying debt itself. This means the credit crisis is predominantly a financial markets problem, not a broader economic ill.

Writing Off Write-Downs, November 2007

Earnings Breather not a Bear Harbinger, October 2007

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2. A Weak US Housing Market Will Sink Stocks and the Economy

Housing market problems have certainly lingered longer than most expected. From that, many extrapolated larger problems for the broader economy. But at least for 2007, nothing panned out. US GDP was stronger in the second half of the year than the first—precisely the time housing woes accelerated. Additionally, important contributors like consumer spending continued to tick upward. Should US housing softness really prove problematic for the broader stock market, the bears will just have to wait for 2008 or beyond.

Freddie Fretting, November, 2007

Our Callous Economy, September, 2007

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1. The US Economy Is Heading for a Recession

Recent polls show better than 60% of US citizens believe we're either already in a recession or headed for one. Throughout the year forecasters feared a recession. But, as was the theme for this entire column, anticipation never jibed with reality.

Recession Confusion, December, 2007

The Willie Loman Effect, December, 2007

Recession Quiz, December, 2007

Recession Risks?Inconceivable! September, 2007