NEW YORK – Now that the endless parade of college football bowl games is finally over, we can officially begin the New Year. Here's my countdown for what might happen and what should happen in 2006, financially, economically and otherwise.
Five Wishes for the New Year
A stock market that goes in one direction or the other. In 2005, the Dow Jones Industrial Average traded in its smallest range in more than 100 years – just over 8%, according to the Stock Trader's Almanac. We're tired of trading ranges: give us a good old-fashioned bear market or a robust bull market. And then give us the sense to know how to handle our investments when the Dow does break out of its narrow trading range.
Better health-care solutions for seniors. You have to wonder if the Medicare prescription plan will cover headaches, since that's what it's causing retirees and their middle-aged sons and daughters who are trying to help them choose what's best. Could we please simplify this mess and make it easier for people to cover themselves and their families? (And not just Medicare either: Regular health care issues are making baby boomers age prematurely, too.)
A housing market that holds up – at least long enough to sell your home at the price you want to get. But you had better hurry, because the signs are piling up that this market is slowing down. New home sales fell in November, while a record number of unsold homes are now on the market (4.9 months inventory). Sales down, inventory up? Those are bad conditions for home sellers.
A corporate sector that starts spending. We consumers have carried this economy with our personal spending for years now. Isn't it time for our corporate brethren to step up to the plate? Corporations are flush with cash, because they didn't find beneficial ways to invest it in 2005. Instead, they did a good job of repurchasing shares and delivering dividends – and that's a plus for shareholders. But the downside is that companies are not reinvesting in their own businesses. According to a recent Wall Street Journal article, industrial companies in the Standard & Poor's 500 have "nearly $631 billion on the books. That figure represents more than 7% of these companies' market value – the highest percentage since 1988." Let's see them take some of that cash and spend it on their own businesses in 2006, which should ultimately support the U.S. economy.
An increase in peace on earth and good will toward all. In a world that's experiencing a large share of unrest and unease, it would be particularly welcome to see a resolution to the conflict in Iraq that brings security and self-government to its people, so that U.S. troops can start coming home without jeopardizing the balance in the Middle East.
Four Smart Moves for the New Year
Put more money away in savings in case the economy and the markets both turn down.
Pay attention to what technical analysts say, rather than depending only on fundamental analysts. As bull markets elongate, technical analysts who read charts and look for cycles and patterns go out of style. Witness this year's letting-go of technical analysis teams at Smith Barney and Prudential. But when financial markets turn bearish, technical skills and chart-reading become more venerated, because no one else can make sense of why the markets are doing what they do.
Take heed of the yield-curve inversion. It's too easy to succumb to the "common wisdom" that the late-December inversion of the yield curve is nothing to worry about. After all, recessions don't always happen when long-term interest rates fall below short-term interest rates. But, remember this: every recession that has happened came after the yield curve inverted. In fact, analysts at Elliott Wave International have determined that "in conjunction with bullish market expectations, an inversion has always resulted in a significant stock market decline."
Surpri-ise: Market sentiment is more bullish than ever. From the January issue of The Elliott Wave Financial Forecast: "Without a single week of more bears than bulls in the Investors Intelligence sentiment survey, 2005 marks the third straight year of a bullish plurality, the longest streak in the survey's 40-year history."
Nail down a fixed rate for your mortgage or home equity line of credit. As the prime rate rises, so does your overall payment. Interest rates used to be much lower (think 4.68% in June 2004 vs. 7.7% in December 2005, according to financial publisher HSH Associates, as cited in a recent Wall Street Journal article). So a year and a half ago, it made sense to disdain fixed rates, but the ball game has changed.
Three Stories To Watch for in 2006
Ken Lay and Jeffrey Skilling find a way to explain what happened at Enron without taking the blame for it.
Financial institutions find a way to explain both higher interest rates and higher personal bankruptcies without taking the blame for them.
Ex-lobbyist Jack Abramoff did find a way to take the blame for fraud, public corruption, and tax evasion in a deal he cut with federal prosecutors that will result in up to 10 years in prison. Now let's see how much of the blame he spreads around to his business and political colleagues.
Two Things to Avoid in the New Year
Bird flu. A pandemic would overwhelm many nations, including ours, physically and economically. Like the hurricanes that brought devastation in 2005, bird flu could disrupt all normal functioning – but this time on a global scale.
Losing money you aren't prepared to lose. When trading, it's best not to get too greedy. People lose money by going for "home run" trades, rather than taking the profits from their "singles" and "doubles."
One Unpleasant Scenario for the New Year
The stock market takes a dive when Ben Bernanke takes over at the Fed from Alan Greenspan. Remember, it happened to Greenspan when he took over from Paul Volcker. The markets like to mess with new players.
One Pleasant Scenario for the New Year
The Atlanta Braves finally get a closing pitcher and win the World Series. (I can dream, can't I? If the Boston Red Sox and the Chicago White Sox did it, I've got to believe that the Braves are due sometime this century.)
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. She is a Stanford University graduate with a B.A. in Classics.
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