Recession Beaters For 2008

As the year comes to a close, there is a lot of worry out there on Wall Street. For evidence of that hand-wringing, just check out a simple stat on stock market volatility: the CBOE Volatility Index--a literal measure of volatility reflecting the premium that options traders are willing to pay on the S&P 500 Index options--spiked 250% from January through mid-December. This was one of the quickest and most dramatic increases in volatility since early 1994.

Heading into the New Year, Forbes.com checked in with a few market pros to see where they're putting money in 2008. These gurus had some wide-ranging opinions on how they plan to position their portfolios, which sectors they like and which ones they're planning to avoid. These big-picture professionals were at odds over which areas of the market had the most prospects and where they would counsel investors to commit capital.

Let's start with a sector that has made headlines this year for all the wrong reasons: the financials. Wall Street heavies like Citigroup (nyse: C - news - people ) and Bear Stearns (nyse: BSC - news - people ) suffered big losses due to risky mortgage-related holdings that went bad. The Financial Select Sector SPDR (amex: XLF) is down, year-to-date in 2007, about 20%.

But are these financial companies ready to turn around in 2008?

Stack isn't buying primarily because he expect "extreme volatility" in the financial sector in 2008. He cautions investors to avoid the companies until they see at least three to four months of bottoms in stock prices. Only then, Stack says, should investors start to think about pushing money into the sector.

"There is so much still coming out of the woodwork," Stack says. "How do you judge the internal risks when all the unknowns aren't out on the table?"

By contrast, "growth at a reasonable price" fan Jim Oberweis, editor of the Oberweis Report, thinks there could be some opportunity in this sector. "My inclination is to buy early out the gate," Oberweis says. "Don't wait too long."

In the financials, Oberweis says to look for cheap valuations. He says one possibility, for example, is Citigroup, which has gotten badly beaten up this year (the stock is down 45%), but is now trading at eight times estimated earnings.

"If those earnings are correct, that is a bargain," Oberweis says. He notes that the company has historically traded at an estimated price-to-earnings ratio between 10 and 15.

In contrast to the fumbling financials, materials have turned in a strong performance in 2007. Materials Select Sector SPDR (amex: XLB) is now up, year-to-date, about 17%. But some market pros aren't so sure the sector can turn in another solid performance next year.