THE ECONOMY ENDED

2007 with a whimper, but with a backdrop of housing woes, faltering credit markets and the worst holiday shopping season in five years, a bang would've been much worse.

The Wall Street experts we consulted remained short on specifics, but they generally agreed 2008 isn't going to be a robust year for investors. Recession fears persist, and opinions are diverging on the benefits of foreign equities, while forecasts for U.S. corporate earnings and stock index performances remain uneven.

"Given the uncertain economic prospects, there has been much discussion around the idea that Street sell-side consensus 2008 S&P 500 EPS growth of 13.6% is too high (and well above Citi's 5.2% forecast) but we think that equity market investors simply do not believe the teen-like figure," Citigroup's Tobias Levkovich wrote on Dec. 7. "If they did, we strongly doubt that stock markets would have corrected much in an environment of good earnings potential and lowered interest rates nor would investors have rushed to hide out in safe haven defensive sectors or Treasury bonds over the past three months in particular." In a Dec. 26 review note, Levkovich called 2007 "a disappointing year."

Policy makers factored heavily into many strategists' assessments of where the economy is going. Ed Yardeni, president of Yardeni Research, had strong words for the Federal Reserve's leadership, which he believes hasn't done enough to reduce investor anxiety by easing interest rates. He called Chairman Ben Bernanke to the carpet in a Dec. 12 note. After noting that the housing recession appeared to be spreading to business and consumer spending, the Fed cut rates 25 basis points at its Dec. 11 meeting, and said the cut, "combined with the policy actions taken earlier, should help promote moderate growth over time." That set Yardeni off.

"In effect, U.S. monetary policy is now being conducted by Princeton's Economics Department, which was chaired by Ben Bernanke before he went off to Washington. In other words, the academics just don't seem to understand markets," he wrote. "Worse, they seem to be fighting the markets because they don't want to appear to be bullied by them. They say they are monitoring 'incoming information,' but seem oblivious to the markets, which process information better than any econometric model. On Wall Street, we often say, 'Don't fight the Fed.' Someone should tell the Fed, 'Don't fight the markets.'"

The markets would like to push back a bit, Charles Schwab's Liz Ann Sonders wrote Dec. 14: "As recession fears grow, investors are unimpressed by the Fed's actions to date, and hope for more aggressive moves."

The Fed's actions heightened corporate leaders' fears of recession, said Ed Hyman of ISI Research. He wrote Dec. 7 that 43% of respondents in a poll of chief financial officers placed high odds of a recession. "Breaking the results in consumer versus everything else, front-end companies were clearly more pessimistic than the back end," he wrote. A Dec. 10 report noted that, "It's not necessarily that the current moves by the Fed/administration will work. It's that there will be more Fed/administration moves until they do work."

That's going to keep investors guessing, and they should be prepared for ups and downs in 2008, Bank of America's Thomas McManus wrote Dec. 10. "We expect the Federal Reserve will continue to cut interest rates despite their justifiable concerns about fanning global inflationary pressures. We anticipate a continuation of volatility and meaningful further downside risk for consensus earnings estimates as we enter 2008."

Richard Bernstein, chief investment strategist at Merrill Lynch, warned early in December that investors should avoid a common mistake when they formulate strategies for the next year.

"It is often tempting in this point in the cycle to buy value," he wrote on Dec. 4. "However, if credit markets do indeed tighten as much as we expect, value is likely to underperform. Under these conditions, 'value traps' stocks whose valuations appear to be inexpensive but that lack earnings momentum or relative strength should be avoided. Groups that are in this category include financial, housing and many consumer-related industries."

For more of what our pundits are saying, read their latest predictions here.