U.S. stocks seen ending 2008 higher despite credit crisis

NEW YORK (Reuters) - U.S. share prices will struggle during the first half of the year as they work to overcome strains from the credit crisis but will enjoy ample gains in the remainder of 2008, according to the latest Reuters poll of investors and strategists.

Attractive valuations and drastic measures by the Federal Reserve are expected to help stocks stage a rally, according to the poll of 22 money managers and strategists which was conducted last week.

The forecasts were taken before JPMorgan Chase bought ailing investment bank Bear Stearns at the weekend and the U.S. Federal Reserve extended lending directly to securities firms for the first time since the Great Depression.

The poll participants gave a median end-2008 forecast of 1,500 points for the Standard & Poor's 500 index .SPX, a gain of 17.5 percent from Monday's close of 1,276.60.

That closing forecast, however, compares with a forecast of 1,613 given in the previous poll taken in December.

Friday's emergency rescue of Bear Stearns sent shockwaves through world markets.

Already, the Fed has slashed its benchmark rate by 2.25 percentage points since September to 3 percent, and is expected to cut rates again at its policy-setting meeting later on Tuesday. Many of the U.S. primary dealers now see policy makers lowering the federal funds rate by 1 percentage point.

Major indexes plunged on the Bear Stearns news, extending losses for the year. The S&P is down more than 13 percent, while the Dow Jones industrials index .DJI is down nearly 10 percent.

The crisis in credit markets and housing has also dragged down expectations for growth this year.

"Fair to say we think it's a dicier call to say 'no recession,'" Bob Doll, global chief investment officer of equities at money manager BlackRock Inc. (BLK.N) told Reuters.

Even with the risk of recession in the U.S. rising, rooted in mounting defaults in subprime mortgages, many investors and strategists like Doll aren't dismissing further equity gains.

Doll, who helps oversee more than $1.1 trillion in assets, said he sees "light at the end of the tunnel for credit and the economy," forecasting that the S&P will end the year at 1,500.

The poll predicted the Dow industrials index to be at 13,900 by year-end. That would be a 16 percent rise from Monday's close of 11,972.25, and would give a 4.8 rise for the year.

That is much lower than the year-end forecast of 14,750 given in the last Reuters poll conducted in December.

STILL NO TAKERS OF FINANCIAL STOCKS

Strategists and money managers said they favored companies with huge international exposure, particularly as a play on the falling dollar.

Tech shares fit that bill, although investors have also been attracted to that sector by share price falls.

"Valuations are now near 10-year lows for many tech issues and companies must continue to invest in technology to remain competitive," said Fred Dickson, market strategist at D.A. Davidson & Co. Lake Oswego, Oregon.

"One example, we can't remember the last time Intel Corp (INTC.O) provided a yield in excess of the 5-year Treasury note yield."

In contrast a majority of those polled were still avoiding financial stocks.

"We see much bigger than current expected credit and mortgage-related instrument write-offs for this quarter, and possibly next quarter," Dickson said.

"Credit problems remain and long-term interest rates will start moving up," said BlackRock's Doll.

Even Goldman Sachs Group (GS.N), which has appeared relatively unscathed by the credit crisis, has seen its shares drop around 30 percent so far this year.

Jack Ablin, the chief investment officer of Harris Private Bank in Chicago, said "there really aren't places to hide."

But while Ablin's target of 1,468 on the S&P is a 15 percent rise from Monday's closing level, he said that was based on a second-half rally, fuelled by the lagged effects of aggressive rate cuts.

He's been heavily overweight on pricey commodities and those stocks exposed to the sector because "I'd rather have my money in hard assets over paper assets right now. I am not ready to make a stab at the market."

(Additional reporting by Caroline Valetkevitch, Herb Lash, Kristina Cooke, Doris Frankel, Ellis Mnyandu, Richard Leong and Justin Grant, Bangalore Polling Unit; Editing by Greg Mahlich)