Shrinking Middle Ground for Stocks and the Economy

As I wrote a few weeks ago, this is an especially confusing time on Wall Street. And the stock market’s performance so far this year does nothing to clear up a very cloudy outlook. Recently the Deutsche Bank (db) economics team said the uncertainty won’t be resolved until well into this quarter, or “more likely” into the second quarter. Another prediction also caught my eye, because I think it explains why it feels like such an excruciating time in the stock market. “U.S economic fundamentals [imply] high probabilities of polar outcomes for the equity market in 2008,” the team led by Steve Pollard wrote. In other words: Stocks probably will have a really great year or a really bad year, with a lower likelihood they’ll end up somewhere in between. “Collapsing housing, elevated oil prices and tightening credit conditions” could send stocks falling 15%, they said, while more job growth, a cheap dollar (helping exports), and Federal Reserve interest rates could send stocks up 16% by the end of the year. Deutsche Bank says there’s a 60% chance that we’ll see the better scenario. Not very reassuring odds.