- The Washington Times - Tuesday, January 10, 2006

The Dow Jones Industrial Average yesterday punctuated a strong new-year rally with its first close above 11,000 in more than 4-1/2 years.

The Dow advanced nearly 300 points since Jan. 2 to close yesterday at 11,012 on evidence that obstacles to growth that had hampered the market last year may be falling, with energy prices stabilizing and the Federal Reserve nearing an end to a long streak of interest-rate increases.

An upgrade for the stock of the beleaguered General Motors Corp. helped push the blue-chip average over the 11,000 mark yesterday after it appeared to falter. The blue-chip Standard & Poor’s 500 index also ended at a 41/2-year high of 1,290, and the Nasdaq Composite Index hit 2,319, its highest level since February 2001.

“The market is long overdue for a strong rally in 2006,” said Harry S. Dent, president of the H.S. Dent Foundation, who thinks stocks will benefit this year as the five-year-old reign of housing, gold and oil comes to an end.

Oil prices declined from three-month highs yesterday, but gold prices soared to a 25-year high of $550.50 in New York trading.

Housing, oil and gold prices appear to have peaked, and so have short-term interest rates, said Mr. Dent, “all of which clears the way for a bull equity market.”

The 53-point climb yesterday over the Friday closing may be the breakthrough needed to jolt the market, he said. “Since the markets did not rally in late December, we were looking for a big launch in January,” he said.

Although stocks should enjoy a good or even great year — with the Dow possibly hitting 14,000 or 15,000 by year-end — the housing market is likely to slow dramatically, Mr. Dent said.

The housing slowdown in Washington deepened last month, with the number of contracts on homes dropping more than 20 percent over December 2004 in the District and in Montgomery County, the Greater Capital Area Association of Realtors reported yesterday.

“The truth is that home price appreciation has suddenly declined to near zero in the last year — just as occurred in international markets like Australia and Great Britain,” Mr. Dent said.

“House prices will continue to trend down through the summer of 2006 — except in overvalued markets like South Florida, California and the Northeast, which could drop sharply,” he said. “As real estate prices decline, investors typically move money into equities.”

William F. Dwyer, president of MTB Investment Advisors Inc. in Baltimore, agreed that stocks should perform better this year after a flat 2005, thanks to a cooling of the housing market, energy prices and inflation.

“The stock market could take over the momentum for consumers that housing has enjoyed for several years,” he said, with the S&P; index rising as high as 1,500 if inflation declines during the year.

The bond market also should provide better returns this year after a middling performance last year, hampered by the Fed’s rate-raising campaign, he said.

But other stock analysts are not so optimistic. They note the U.S. economy still faces major problems, such as a flirtation with bankruptcy by the nation’s top two auto companies, GM and Ford Motor Co., which has weighed on stocks.

GM benefited yesterday from an upgrade by Goldman Sachs analysts to an “in-line” rating on their judgment that a bankruptcy filing by the world’s largest automaker is unlikely “anytime soon.” GM jumped $1.61 to $22.41.

Another big Dow component, JPMorgan Chase, added 65 cents to finish at $40.67 after an upgrade to “neutral” by Prudential Equity Group LLC.

Bill Cheney, chief economist at John Hancock Financial Services, said the economy is “bound to slow” this year as consumer spending and the housing market cool, and that will hurt corporate profits and limit growth in the stock market.

Economic growth has been surprisingly strong outside the United States in the past three years, and the stock markets of faster-growing developing countries are likely to continue to outperform the U.S. market, he said.

Jeffrey N. Kleintop, chief investment strategist at PNC Advisors, expects below-average returns of 7 percent to 10 percent in the S&P; index this year as economic and earnings growth slows.

“International stocks are likely to outperform U.S. stocks” given the lower valuations, greater momentum and more accommodative financial conditions overseas, he said.

But any marked slowdown in the U.S. housing market will benefit stocks, he said. Stocks in Britain jumped 70 percent after home price gains cooled from 25 percent in 2003 to 2 percent currently, he noted.

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