Investors Look Ahead to Economic 'Soft Landing'

If the Federal Reserve and other policy makers can pull off a "soft landing" similar to the one that occurred following the big run-up in stocks in 1985-1986 and again in 1995-1996, investors will be smiling.

However, it will be a difficult task, for a long list of risks threatens to slow the economy in 2007 in response to two years of rate increases by the Fed, according to Bloomberg columnist Chet Currier.

The Standard & Poor's 500 stock index rose at an annual rate of 25% in 1985-1986 and at a rate of almost 30% a year in 1995-1996. In the years following those periods, the U.S. economy slowed without going into a recession. In both those two-year periods, as now, the Federal Reserve had spent the preceding months increasing short-tem interest rates to restrain inflation, so the record suggests there may be big payoffs in store.

However, an inverted yield curve, an oil-price shock and a severe real estate crunch are all warning signs, wrote Liz Ann Sonders, chief investment strategist at Charles Schwab in a recent website commentary.

Yet optimism persists that a slowdown can be achieved without actual declines in economic output. More than 60 economists in a monthly Bloomberg News survey call for inflation-adjusted growth in the U.S. gross domestic product to continue at 2.7% or 2.8% through the second quarter.

If a recession is in the cards for the economy as a whole, markets will surely feel more pain. If nothing more than a moderate economic slowdown occurs, then investors could have some pleasant surprises in store.

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.