Stock market will rally in 2008: Evergreen

By Walden Siew

NEW YORK (Reuters) - The U.S. stock market will rally in the second half of 2008 and robust corporate bond issuance means the U.S. economy is "on solid footing," a senior fund manager at Evergreen Investments said on Tuesday.

While the U.S. housing and credit crisis has roiled global financial markets, the Nasdaq .IXIC is up more than 12 percent year-to-date, the Dow .DJI gained 10 percent and the Standard & Poor's 500 index .SPX is up nearly 7 percent.

"We're at the beginning of our year-end rally, and I think that history will favor financial markets and equity markets next year," Margaret Patel, a senior portfolio manager at Evergreen Investments in Boston, said at the Reuters Investment Outlook 2008 Summit in New York.

Patel, who forecasts a "very strong finish" in 2008, oversees about $1.4 billion in assets, including mostly stocks and some high-yield debt.

"As we get into next year, we will work through and be halfway through the subprime financial correction cycle, and that will set us up for an acceleration of growth," Patel said.

The subprime mortgage crisis and the resulting credit crunch have resulted in billions of dollars in write-downs at major financial companies this year.

Sales of investment-grade U.S. corporate bonds surpassed a yearly record last week, hitting $944.5 billion, up from $936.6 billion in all of 2006, according to Thomson Financial data.

Those sales suggest companies are borrowing to invest in future expenditures and acquisitions, Patel said.

A rise in corporate bond sales "says the economy is on very solid footing because if companies are very concerned about the future, they are not going to borrow money," she said. "There's still huge appetite to lend money to quality borrowers."

Nearly one-fourth of the companies making new corporate bond sales in the fourth quarter said they would use some proceeds for capital expenditures, Moody's Investors Service said in a new report on Monday. That compares with only 7 percent at the beginning of the year.

Record debt sales also highlight the unusual nature of the credit crisis, which has seen short-term debt markets freeze up at the same time bond investors are willing to extend long-term credit to corporate America.

More than $44 billion in new sales were issued in the past two weeks, with significant demand, according to JPMorgan.

"Issuers are happy to issue deals at the current low-yield/low-coupon environment, despite paying credit spreads that are very high by historical standards," JPMorgan said in a report on Tuesday.

Average corporate spreads have more than doubled to 204 basis points from 95 basis points in mid-June before the credit crisis set in, according to Merrill Lynch data. Wider spreads have been mostly offset by falling yields on Treasuries, however.

The yield on 10-year Treasury notes, a benchmark for many corporate bonds, fell just below 3.8 percent on November 26, down from a peak above 5.3 percent in mid-June and the lowest since early 2004.  Continued...