Stock Market Outlook for 2006 -- Advance - January 3, 2006

[ Daily Column | Archive | Books | Lore | Resources | Charts | Adages | Glossary | Search | Contact Us ]

January 3, 2006 (Previous version, latest)

Overall

1. 2006 will be a year of significant transition in many sectors of the economy, some positive, some negative.
2. Overall economic pace will remain roughly the same, sometimes a little slower and sometimes faster, but no recession.
3. Confidence in the overall economy will improve moderately as the year progresses.
4. Incremental market advance, albeit with significant volatility.
5. Energy stocks will begin to wilt as the year progresses
6. Short-term interest rates will be "neutral" most of the year as the Fed pauses before the Summer. Probably around 5.00%.
7. Inflation will be reasonably modest and a non-issue, although heatedly debated.
8. Energy may remain elevated, but not spike up as high as in 2005.
9. Consumers will continue to be relatively impervious to high energy prices. They will continue to shop.
10. There won't be any big-deal crises (ala 1998), but maybe a few mini-crises that are quickly defused.

Some Changes from 2005

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

Lots of Factors Unchanged from 2005

1. The economy has significant underlying strength.
2. Lots of corporate restructuring.
3. More companies will vanish from the S&P 500 (due to acquisitions) and new companies will take their places
4. Lots of corporate cost-cutting.
5. Still lots of cash sloshing around.
6. Incremental improvements in dividend yield, including technology companies.
7. People continue to see U.S. dollar assets as the safest in the world.
8. More consolidation, fewer public companies.
9. Incremental population growth (1%) continues to underpin economic growth.
10. Still too much excess capacity in too many sectors of the economy.
11. Airlines continue to struggle.
12. Consumers still reasonably strong.
13. Many stocks continue to feel overvalued, or at least not dramatically undervalued.
14. Exchange-Traded Funds (ETFs) continue to grow in popularity relative to mutual funds.
15. 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.
16. General Motors (GM) will not declare bankruptcy, but people will continue to incessantly chatter about it.
17. Still way too much "hot money" (e.g., hedge funds) bouncing between sectors and trying to time the market.
18. Still "a stock-picker's market", with quite a number of stocks having gains much greater than the major indexes.
19. Any number of commentators will continue to drone on about "deficits", out of all proportion to their economic significance.
20. Still some intense, lingering interest in commodities and real estate as the year opens, but both will fade somewhat as the year progresses.

Crises Unlikely to Happen

1. A recession -- NOT!
2. The market will fall off a cliff as it did in early 2005 -- NOT!
3. The housing bubble will "burst" -- NOT!
4. The U.S. dollar will fall off a cliff -- NOT!
5. China will dump it's U.S. Treasury debt -- NOT!
6. International investors abandon dollar assets -- NOT!
7. War with Iran -- NOT!
8. Major terrorist attacks disrupt the U.S. economy -- NOT!
9. Fannie Mae and the other GSE's implode -- NOT!
10. Deficits cause the U.S. economy to implode -- NOT!
11. Dow plummets to 7,500 -- NOT!
12. NASDAQ falls below 1,000 -- NOT!
13. Corporate pension funds cause a major market crash and long-lasting economic recession -- NOT!
14. Crude oil rises over $100 -- NOT!
15. Gold rallies to $850 -- NOT!
16. 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, or "buy on the dip."

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.

Other Developments

1. The Internet continues to gain share in all areas of commerce and media.
2. The Wall Street Journal will continue its decline in editorial quality, becoming more tabloid-like as the year progresses. Editorial content will continue to focus increasing attention on Iran and the "war on terror", while important domestic economic issues get decreasing coverage in favor of sensationalist stories designed to boost readership in a world increasingly focused on free, ad-sponsored editorial content on the Internet. The "Journal" will continue as a source for reporting of "leaks", but we need to be increasingly skeptical of the hidden agendas of unidentified parties "leaking" information. In general, investors should ignore all reports that are based on leaks, unless there is serious confirmation using un-leaked sources.
3. Washington will be politics as usual, most of which investors can completely ignore.
4. The popular media will lose some (more) of its excitement and become increasingly dull. There will be nothing comparable to a "wardrobe malfunction" in 2006.
5. Google will continue to lose focus and neglect its core search engine constituency (and cash cow). In late December there were rumors that Google might buy a film studio. Yes, they have the raw cash to pursue all manner of opportunities, but they can't afford the dispersion of management attention that is occurring. Who will pick up the slack? Microsoft, as well as Yahoo, not to mention the emergence of some upstarts.
6. Although the current housing boom will continue to fade, interest will pick up in replacing an aging stock of lower-income and subsidized housing, driven primarily by concerns about energy cost and efficiency, but basic health and safety issues as well. So many older housing units are quite simply firetraps and disasters waiting to happen.
7. Mortgage-backed securities (MBS) may be somewhat problematic if too many people default on risky mortgages if housing prices decline even modestly, but the risks are amortized over such broad demographics and large volumes that the sector will be safe, spare a major recession. Some smart Wall Street types may pick out the silver lining in this cloud and split MBS's into two "tranches": lower-risk, lower yield "safe" securities, and higher risk, higher yield "high yield" or "junk" securities. Investors who are "chasing yield" will willingly accept some of the latter, especially if they know that the former are much safer.
8. More and more people will begin to recognize that America is falling apart, literally. Much of out infrastructure is aging quite rapidly. Many bridges, tunnels, water, sewage, and power generation and distribution systems, are in dire need of repair, upgrading, and replacement. Many public buildings and schools are in shambles and horribly energy-inefficient. Protection of infrastructure from sabotage and terrorism is also a critical issue. The bottom line: a vast new wave of public construction will begin to ramp up as the year progresses, coincident with any ramp down of housing construction.
9. Sales of hybrid vehicles will begin to take off. Interest in alternative fuels will pick up dramatically.

Some Questions

I submitted the following questions in an email to Bambi Francisco of MarketWatch in response to her Internet list for 2006:

I read your "Internet list for 2006" with great interest, but it sounds like 2006 will be a rather dull year. But, maybe that's where we really are anyway.

 

I don't have a forecast, but here are some questions:

 

1) Will any new exciting startups become media darlings? Will any new net personalities rise up and capture the limelight?

2) How many of the remaining dot-coms will finally kick the bucket? What will be the most prominent casualty?

2a) Will the short-sellers take Overstock.com's stock down into the toilet? Or will the stock become one of the year's big successes?

3) Will AOL's legacy dial-up customers continue to be considered a drag on the business or become an exciting, un-tapped opportunity?

4) Will PeoplePC thrive? Become a big success? Or shrivel up and go away?

5) Will Microsoft increase its investment in MSN or look to distance itself from the unprofitable portions? Will they hang on to their legacy dial-up users (e.g., me since July 1999 @ $19.95/mo) or finally hang up on them for good?

6) Will Google finally find a way to stumble?

6a) When will those a-holes over at S&P finally add GOOG to the S&P 500 index?!

7) Will a blog-related firm rocket up to the Tier 1 internet level, or will the blogosphere implode in a cloud of confusion, self-doubt, and acrimony?

8) Will there be any mega-deals so that one or two or three of the Tier 1 Internet players are "taken out"?

9) Will white-knight Carl Icahn manage to con[vince] Time Warner to spin-off AOL into a free-standing enterprise with no management strings attached?

10) Will high interest rates significantly slow the tech sector, or is cash simply not going to be an issue at all?

11) Will an average investor do quite well just buying the top-10 internet stocks (or some equivalent ETF) or will that be a bad choice and significant cherry picking is required?

12) Will Microsoft finally make a big dent in the Internet business in 2006 or continue to circle around the perimeter, nibbling a little now and then, and continually making loud snorting noises?

13) Will Yahoo and Microsoft finally wake up and realize that a competitive answer to Google's AdSense revenue-sharing program would be a really good move?

 

Maybe I'll close with a little prayer: "Dear God, Please let SOMETHING exciting happen in the Internet sector in 2006."