1. Energy costs will stay relatively high. This will lead to good profitability for energy companies. They are running near capacity, and machinery is wearing out. Their suppliers will also do well. I am keeping my exposures to these sectors.
2. Housing demand will moderate from a fantastic pace to a good pace. The economy will continue to grow, making leases of commercial and retail properties attractive. While I do not expect the same returns as 2005, I still think performance will be above the S&P 500. I am keeping my exposure to the REIT sector.
3. Large stocks will outperform small stocks. At late mid-cycle large cap stocks generally do better. I will reduce my exposure to small cap stocks and increase my exposure to large cap stocks.
4. The US Dollar will devalue against the Yen, Yuan, and Euro. As a result, international stocks will do better than US stocks. I am increasing my allocation to EAFE and may add some emerging market exposure.
5. Interest rates will continue to rise. The curve will not invert enough to trigger an economic downturn. The 10 year note will move with Fed Funds. Keep duration very short on bond positions (under 2 years).
6. Inflation will begin to rise. Use floating rate notes for bond positions. TIPS are overvalued in my opinion. It is still too early to buy them. I would look to TIPS when the 10 year US Treasury moves over 5.5%.
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