Stock Market Outlook for 2006 -- Advance - December 31, 2005

December 31, 2005 (latest)

Overall

2006 will be a year of significant transition in many sectors, some positive, some negative.
Overall economic pace will remain roughly the same, sometimes a little slower and sometimes faster.
Confidence in the overall economy will improve moderately.
Incremental market advance, albeit with significant volatility.
Energy stocks will begin to wilt as the year progresses
Short-term interest rates will be "neutral" most of the year. Probably around 5.00%.
Inflation will be reasonably modest and a non-issue, although heatedly debated.
Energy may remain elevated, but not spike up so high.
There won't be any big-deal crises (ala 1998), but maybe a few mini-crises that are quickly defused.

Some Changes from 2005

Short-term interest rates getting ready to stabilize.
Housing not forecast to be a growth sector.
The U.S. dollar not forecast to fall off a cliff.
Fewer people on the verge of bankruptcy, more people recovering from bankruptcy.
Commodities will soon lose their luster. Maybe one more "hurrah" before dramatically losing momentum.
Treasury yield curve will remain fairly flat all year.
Interest income will be significantly higher. The better money market mutual funds will yield over 4.00%.
Incremental shift from fixed income assets to stocks, causing a moderate rise in longer-term interest rates.
Only a modest decline in unemployment.
No significant inflows into stock mutual funds to prop the market up dramatically.
Corporate profit growth more anemic, but still growing.
Consumer spending tapers off somewhat, but still reasonably strong.
Negative sentiment incrementally lightens up.

Lots of Factors Unchanged from 2005

Lots of corporate restructuring.
Lots of corporate cost-cutting.
Still lots of cash sloshing around.
Incremental improvements in dividend yield, including technology companies.
People continue to see U.S. dollar assets as the safest in the world.
More consolidation, fewer public companies.
Incremental population growth (1%) continues to underpin economic growth.
Still too much excess capacity in too many sectors of the economy.
Airlines continue to struggle.
Consumers still reasonably strong.
Many stocks continue to feel overvalued, or at least not dramatically undervalued.
Exchange-Traded Funds (ETFs) continue to grow in popularity relative to mutual funds.
Stephen Roach, Morgan Stanley's Chief Global Economist, continues to fret about global imbalances and have an overall gloomy outlook, especially for U.S. markets, but he continues to be somewhat irrelevant to the economy as it plays out.
General Motors (GM) will not declare bankruptcy.
People will continue to incessantly chatter about the prospects of General Motors declaring bankruptcy.
Still way too much "hot money" (e.g., hedge funds) bouncing between sectors and trying to time the market.
Still "a stock-picker's market", with quite a number of stocks having gains much greater than the major indexes.

Crises Unlikely to Happen

The market will fall off a cliff as it did at the start of 2005 -- NOT!
The housing bubble will burst -- NOT!
The U.S. dollar will fall off a cliff -- NOT!
China will dump it's U.S. Treasury debt -- NOT!
International investors abandon dollar assets -- NOT!
War with Iran -- NOT!
Major terrorist attacks disrupt the U.S. economy -- NOT!
Fannie Mae and the other GSE's finally implode -- NOT!
Deficits cause the U.S. economy to implode -- NOT!
Dow plummets to 7,500 -- NOT!
NASDAQ falls below 1,000 -- NOT!
Corporate pension funds cause a major market crash and long-lasting economic recession -- NOT!
Crude oil rises over $100 -- NOT!
Gold rallies to $850 -- NOT!
Pandemic disease brings global commerce to a standstill -- NOT!

Corrections

Even in the strongest of bull markets stocks rarely go "straight up" for more than a few months without some sort of "correction". We should expect at least one correction in 2006 of at least 10% or 15% or even 20%, and possibly two or three or four as the year progresses. A resilient economy will cause some significant stock market gains, but that opens the door to even more sharp corrections whenever the market "gets too far ahead of itself". Traders and speculators seek to make money off these corrections, but true investors can simply ignore them.

It's also very possible that we could see another economic "soft patch" or two or three in the coming year, and each such patch will invite its own stock market correction.

The Bottom Line

The major market indices could end 2006 modestly to moderately up or down for the year. From it's 2005 ending level of 2,205.32, NASDAQ could end down as much as 20% (to 1,750) or up as much as 40% (to 3,100), depending on the evolution of the economy. The midpoint of that range is 2,425, or a narrow range of 2,100 to 2,400. If you have to press me, my single-point target for NASDAQ is 2,550, a 16% gain.

-- Jack Krupansky -- The Unrepentant Optimist (Click here for Jack's Bio)

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Updated: January 02, 2006 04:50:51 PM -0500