Analysts: Expect Rate Cuts in '07

Despite another intraday high on the Dow on Jan. 3, the markets overall ended last week on the downside. Even declining oil prices aren’t helping stocks get back to record levels today. Michelle Caruso-Cabrera spoke with two analysts on “Morning Call” to find out what’s going on.

Owen Fitzpatrick of Deutsche Bank Private Wealth Management and Quincy Krosby of The Hartford appeared on the show. Both agree that the market is overconcerned with the Federal Reserve right now. Will the U.S. central bank cut rates? Krosby and Fitzpatrick say yes, the Fed will ease up during 2007 – as many as three times, according to Fitzpatrick. A drop in interest rates will give equities “room to run,” Fitzpatrick says, and historically stocks tend to do well under these conditions.

FYI: there's live coveage on cnbc.com of Fed Vice Chairman Donald Kohn at 12:45 pm eastern time. He's giving a speech today in Atlanta, Georgia.

Krosby added that hedge funds, mutual funds and other institutional investors were forced into the market at the end of the fourth quarter last year in an attempt to outperform the S&P 500. Now these funds are taking profits and redoing their books. She also noted that a lot of money is coming out of energy as prices decelerate in that sector.

How do investors adjust? Focus on a longer-term picture, Fitzpatrick says. Both he and Krosby predict financial and technology stocks will be the top performers in 2007, but he warns against consumer discretionary investments. A continuing dip in housing will keep consumers out of the game, he says.