Investors ‘feeling pretty good’ about 2006


CHICAGO – Saying that 2006 was an uncommonly good year on Wall Street might be an understatement.

As trading for the year came to an end Friday, investors applauded a 2006 gain of more than 16 percent for the Dow Jones industrial average, two days after it hit an all-time high. They also noted a 14 percent-plus gain for the blue-chip Standard & Poor’s 500-stock index, and 10 percent-plus for the Nasdaq. The advances were the largest since 2003.

The Dow dropped 38.37 points Friday to finish at 12463.15.

“As 2006 ends, clients are feeling pretty good. Everyone knows it has been a very good year,” said investment manager Douglas Nardi, of the Chicago office of Legg Mason Investments.

The results may seem surprising, considering that 2006 had plenty of frightening headlines. There were few signs of any end to warfare in Iraq. The housing market weakened, with prices falling. The domestic auto industry encountered enormous losses, and cut production.

But Wall Street focused instead on an end to rising interest rates. In June, the Federal Reserve ended its campaign of tightening credit, after pushing short-term rates higher in 17 steps over less than two years.

The biggest winning category for 2006 was telecommunications stocks, which were up 33 percent, Nardi said. Energy stocks gained 23 percent. The weakest stock sectors included technology, which gained less than 8 percent, and health care, up only 6 percent.

On Friday, telecom leader AT&T Inc. rose after it offered concessions to the government to win approval of its $86 billion acquisition of BellSouth Corp. Alltel Corp., the fifth-largest U.S. wireless operator, rose toward a six-year high on reports the company is a potential takeover target.

Looking ahead, “the group to watch in 2007 is technology, because earnings comparisons will be favorable,” Nardi said. Conversely, he foresees shares of energy producers flattening.

One explanation for stocks’ favorable results in 2006 was the economy. The expansion has continued for more than 61 months, dating back to November 2001. In that time, nearly 10 million new positions have been created, despite early complaints of a jobless recovery.

The big question is whether the country will make it through 2007 without a recession. Most forecasters are predicting a “soft landing,” which means the economy slows but avoids a tumble.

Those who see trouble ahead cite the weakness in housing. While few analysts are calling it a bubble, a continued absence of growth for home equity could slow consumer borrowing, and spending. That could hamper two-thirds of the economy.

Most analysts, however, believe the coming months will show continued modest expansion. Some believe activity will heat up to a point that the Federal Reserve again is forced to raise interest rates.

“Because of low inflation expectations, members of the Fed were able to drive the economy into slowing down without affecting long-term interest rates – just the opposite of what they wanted – thus engineering a controlled slowdown in the housing market,” said economist Eugenio Aleman of Wells Fargo & Co. in Minneapolis.

However, in the next six months, the Fed will need to stay alert for signs of inflation, he said, because “that is when the bulk of the U.S. labor force gets their pay raises.”

A wild card for the economy will be oil prices, which peaked in mid-July at $78.40 a barrel. They have fallen back to close Friday at $61.08, a drop of 22 percent.

Shares of Exxon Mobil Corp., the world’s biggest oil company, retreated Friday as crude briefly dipped below $60 a barrel for the first time in a month.

Copper producers Phelps Dodge Corp. and Freeport-McMoRan Copper & Gold Inc. also slid as the metal fell to an eight-month low.

(c) 2006, Chicago Tribune.

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Distributed by McClatchy-Tribune Information Services.

AP-NY-12-29-06 1914EST