Stock Market: …and a Happy New Year!

The stock market gave investors plenty to celebrate at Thanksgiving as the Dow reached all time highs - an end to a year where investors have seen months of lackluster performance rapidly transformed into a confident upswing. We’ve also seen, in recent months, some sharp reversals of major trends that had shaped economic performance for several years. Among these shifts are the slump in the housing sector and the leveling of interest rate increases. The pundits are predicting slack economic growth, but most suggest that the coming year will be a good one for stocks and bonds.

What’s ahead for investors in 2007? Forecasting stock market performance is always a highly uncertain business, but here are some of the key issues and trends that experts believe will shape market performance in 2007.

• First of all, many believe that inflation has been tamed, and that prospects are good for investors. They don’t expect to see major increases in oil prices (though geopolitical events remain the "wild card") because drilling continues and increased supplies will continue to be available. Without the prospect of major energy price hikes, there appears to be little to boost inflationary pressure.



• The economy is cooling but market gurus believe that a modest growth rate is the best medicine for any lingering inflation worries. Many believe that the slower growth predicted for the first two quarters of 2007 will not outweigh many positive economic factors - including low unemployment and healthy corporate profit growth rates - and that the economy will weather the downturn in the housing sector. The optimists go further and suggest that a slow-growth economy is positive for investors, because it allows inflationary pressures to decline more gradually over time, creating a more stable economic base, with better prospects for longevity.



• The mood is upbeat on Wall Street. The Dow Jones Industrial Average (DJIA) remained stagnant for more than a year as the Federal Reserve tackled inflation, but stocks never went into the sharp decline that usually signals the start of a recession. As soon as it became clear that the Fed had conquered the threat of inflation, investors responded and the Dow reached its highest point ever.



• Some investors might worry that, with the Dow showing record highs, all the good news has already been priced into the market. Analysts say that is not the case. They suggest that blue-chip growth companies, including technology sector leaders and some major consumer companies, have been hurt in the past by rising interest rates. With interest rates stabilizing and inflation tamed, many investment experts believe they are primed to make a comeback.

Of course, the year ahead will have its challenges, too. People with business interests, or major investments, in the housing sector, as well as homeowners trying to sell their properties, are unlikely to see any relief soon. Although most experts see a "bounce back" occurring by 2008, some anticipate that some of the hottest real estate locations that attracted significant speculation may not see any real recovery until 2009. However, with inflation tamed, the news is positive for people who have their money in financial assets like stocks, bonds and 401(k) plans. All signs suggest that 2007 will be a good year for investors.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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