Rate cuts to help U.S. stocks edge higher in 2008

By Kristina Cooke

NEW YORK (Reuters) - U.S. stocks are expected to rise in 2008 thanks to interest rate cuts, but it could play out much like this year as the housing and credit market crunch deepens, a Reuters poll of strategists and fund managers showed.

Poll participants said a number of rate cuts -- a quarter point cut to 4.25 percent is widely expected from the U.S. Federal Reserve on Tuesday -- will be needed to jumpstart a floundering economy that some see heading for recession.

"Two more cuts should enable us to avoid recession, but it will be a very close call; everything else also has to go right," said Hugh Johnson, chief investment officer of Johnson Illington Advisors.

The survey of 28 strategists and money managers gave a median end-2008 forecast of 1,613 for the Standard & Poor's 500 index .SPX. The September poll predicted the S&P 500 would reach 1,650 by the end of 2008 and 1,575 by the end of 2007.

On Friday the S&P 500 closed at 1,504.66.

Johnson added that high oil prices and a further decline in the dollar, which has already tumbled to record lows this year against a basket of currencies .DXY, could tip the scale.

For this reason, the strategists and money managers said they favored sectors that tend to do well in an economic downturn, such as consumer staples, utilities and healthcare.

Sectors with global exposure, such as technology and industrial conglomerates, were also popular investment choices for 2008.

Poll participants expect the Fed to cut interest rates more than once to restore confidence and unlock credit markets. A separate poll of Wall Street dealers on Friday found all 17 contacted expected a quarter point rate cut on Tuesday.

Some strategists say 100 basis points or more are needed to get the economy back on track. BlackRock's vice chairman, Bob Doll, said several rate cuts were "necessary, but not sufficient for us to avoid recession".

These themes will be discussed further with top strategists including Doll, Pimco's Bill Gross and T. Rowe Price's Mary Miller at the Reuters Investment Outlook 2008 Summit in New York this week.

While the rate cuts could revive the credit markets early next year, most investors say the housing market's woes will drag on well into 2009.

"Central bank actions can alleviate the credit crisis directly, but we have to wait for their actions to work their way through the broader economic system for housing to complete its downturn," said Larry Smith, chairman and chief investment officer at Third Wave Global Investors in Greenwich, Connecticut.

(Additional reporting by Caroline Valetkevitch, Ellis Mnyandu, Herb Lash, Jennifer Ablan, Jennifer Coogan and Bangalore Polling Unit, editing by Will Waterman)