- The Washington Times - Friday, December 29, 2006

NEW YORK — Wall Street yesterday closed out a year that will be remembered for the stock market’s great comeback — a year-end rally that pushed the Dow Jones Industrial Average past 12,000 for the first time.

By all accounts, 2006 ended up a very good year for stocks as bullish investors bounced back from a slumping housing market and the Federal Reserve’s two-year campaign of interest-rate increases. The markets approached record levels in the spring, pulled back sharply in the summer, but found a clear direction in the fall to send the major indexes to multiyear highs.

Blue chips were the standouts of 2006. The Dow Jones Industrial Average, the index of 30 of the nation’s biggest companies, hit record levels dozens of times since achieving its first close above 12,000 on Oct. 19. It traded as high as 12,530 before dipping to its close of 12,463 for the year.

This was the best year for the stock market since 2003, when Wall Street staged a massive recovery from levels sideswiped by a bear market. But 2006 will really be remembered for the market’s soaring to heights not seen since the height of the dot-com era — this time, however, Wall Street advanced cautiously, not recklessly.

The rally was fed by investors’ growing belief that the economy has withstood the Fed’s rate increases and the impact of record-high oil prices. And some analysts expect the advance to continue.

“The stock market is correct in its judgment that we are probably only in the fifth or sixth inning of the game, and that this [economic] expansion may even go into extra innings,” said Stuart Schweitzer, global markets strategist for JPMorgan Asset & Wealth Management. “This was a barn-burner of a year, and I expect reasonably solid results over the course of 2007.”

The major indexes posted healthy gains for the year, with the Dow rising 16.29 percent, the S&P; 500 adding 13.62 percent, and the Nasdaq up 9.52 percent. That’s the best showing since 2003, when the Dow closed up 25.3 percent, the Nasdaq rose 50 percent, and the S&P; 500 gained 26.4 percent — but those gains were the beginning of the market’s recovery from the trough of three straight losing years.

It wasn’t just the stock markets that made significant gains in 2006.

The bond market moved in lockstep with stocks — a rare event on Wall Street. Investors bought into equities because of a strong economy and robust corporate confidence. Meanwhile, typically more conservative bond investors used the fixed-income market as a hedge for a possible recession and interest-rate cuts.

The year was also a bit of a rule-bender for Treasuries. Yields on long-term Treasury notes and bonds were lower than for short-term Treasury bills. Junk bonds were in such demand that their yields were on almost on par with those of investment-grade bonds.

The dollar lost support in 2006 after the Fed stopped raising rates Aug. 8 and kept them unchanged in its past three meetings.

And gold prices continued their rally: Investors have sent precious metals sharply higher, viewing commodities such as gold and silver as safe-haven investments instead of the greenback.

Plunging oil prices also fed the stock market’s 2006 rally. Crude reached record highs in the summer when it briefly surpassed $78 a barrel because of the resilience of consumer demand and expectations of a bad hurricane season. But energy prices soon plummeted to 2005 levels by the fall when traders saw that refiners in the Gulf of Mexico were untouched by hurricanes and realized global crude-oil inventories remained ample.

That retreat gave momentum to the stock market’s rally and enabled investors to tolerate upward blips in the price of crude and gasoline.

Stocks are expected to rise further in the new year, but not without some resistance. A big question still hanging over the market is whether the Fed will feel comfortable enough with the balance between inflation and a moderating economy to start lowering interest rates. If inflation seems to be accelerating, an interest-rate rise could still be in the offing.

“There is going to be a tug of war between the bulls and the bears as we head into next year,” said Quincy Krosby, chief investment strategist for the Hartford.

“We could hit a speed bump as Treasury market yields grow higher, and that could put pressure on the stock market,” she said. “We need to pay close attention to the Fed and how they view what I believe is going to be a growth spurt that will be manifested by yields moving up.”

She also pointed to fluctuations in the dollar as another greater influence on Wall Street. Rising interest rates in Europe could help the region lure foreign investment away from the United States, further pressuring the dollar next year.

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