Investors in the U.S. are undeniably uneasy as they get ready to ring in the new year. It's been more than a year since noticeable cracks began to develop in the domestic residential housing market, and while many glass-half-full prognosticators called for a recovery toward the last half of 2007, the best guesstimate most can come up with these days is that 2008 will be more than half over before housing prices even stabilize. Right now, it's anybody's guess as to when they will start to grow positively.
Steady inflation of food and fuel prices is also hitting consumer pocketbooks, making it more expensive to eat and commute, and a weak U.S. dollar puts a serious crimp on traveling and buying goods from abroad. I'll stop now with the gloomy conditions the U.S. faces as we head into 2008 -- partly because my Foolish counterpart to today's round of Dueling Fools is the bona fide bear for the coming year.
What's an investor to do with all the negative sentiment besieging the market these days? Well, for starters, having a contrarian mind-set can be beneficial during periods of market pessimism or downright panic, which is occurring right now in the financial, housing, and retail industries. Sticking close to home, a way to profit from all of the doom-and-gloom talk is to put one of the most famous value-investing quotes to the ultimate test. Another way to fully harness your inner bull as we enter 2008 is to look abroad for investment opportunities.
Use fear to your advantage
Back in October, fellow Fool Sham Gad wrote an insightful article on the origins and merits of being "fearful when others are greedy and greedy when others are fearful." The message is clear: Buy stocks when the market is falling and sell them when the market is rising -- nothing more than "buy low; sell high."
The problem is, it's difficult for investors to go against the grain, and legendary investor Bill Miller recently mused that "one of the enduring features of the findings in behavioral psychology as it applies to finance ... is the almost complete inability of those who are aware of them to actually apply them."
In other words -- brace yourself -- you may want to start treading in areas of the market where pessimism is highest. That means gravitating toward big banks that are wrapped up in a credit crunch, thanks to overheated housing markets and securities created to allow others to exploit the boom. Certain banks, such as Citigroup and Washington Mutual (NYSE:WM), are bearing the brunt of the subprime debacle, but firms such as US Bancorp (NYSE:USB) and JPMorgan Chase (NYSE:JPM) look quite able to ride out serious volatility for the coming year.
Go with the global flow
Mr. Market is definitely subject to periods of excessive optimism and pessimism, but there are plenty of times he is a highly rational fellow. The majority of market economists and strategists aren't predicting an outright recession in the U.S. for 2008, and many are calling for a continuance of a current trend: Markets abroad will remain the engine for global economic growth as the U.S. regains its footing.
There are two primary ways to profit from this trend. The first is to invest in domestic firms that have a high proportion of international sales. Motley Fool Inside Value picks Coca-Cola (NYSE:KO) and 3M (NYSE:MMM) come to mind, as more than half of their annual sales occur outside the U.S. A weak dollar also boosts their financial results, further helping to offset weaker conditions here at home.
The second method is to invest directly in firms abroad, an approach I have become quite familiar with since joining the Motley Fool Global Gains team. Certain global markets are growing briskly and are expected to continue to do so, with Mexican cement giant Cemex (NYSE:CX) or Irish banking leader Allied Irish Banks (NYSE:AIB) compelling opportunities for investors.
The Foolish bottom line
When the market hands you lemons, make lemonade -- but when the lemonade is on the table, don't be shy to drink it. Domestically, I think 2008 will end up better than most investors are projecting, mostly because there is plenty of downside already built into a number of industries, including financial, housing, and retail.
I expect more of the same with international investments, with emerging markets leading the way; international markets now account for more than half of global stock market value.
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