Bartlett Commentaries
Market Commentary, 01 / 2007
In 2006, a number of factors that were troublesome at the outset (geopolitical, energy, corporate profit growth), eased mid-year and most domestic stock markets turned in mid-teen performance, with foreign stocks somewhat higher. The fixed income markets were hampered to a small degree as interest rates drifted higher.
The Federal Reserve has continued to work to reduce inflationary pressures in the economy despite widespread calls during 2006 for them to ease overnight rates. They remain vigilant on the inflation front, even as oil prices and other commodities have stabilized, ending the year at virtually the same level as where it began. Still, broad measures of inflation remain strong despite year-over-year declines in the energy component. Wage growth has finally shown strength in the face of sub-5% unemployment measures.
As was the case in 2005, most of the equity market gains in 2006 were registered in the latter part of the year. Both the Dow Jones Industrial Average and the Russell 2000 small stock index traded up to record levels during the fourth quarter. A number of factors have all contributed to this fourth year of positive price change:
- The economy in general, and the consumer sector in particular, has proved more resilient than anticipated by most forecasters. When energy prices fell during the second half of the year, this resilience came shining through.
- Corporate profits grew at approximately 15%, well above expectations. Furthermore, long term interest rates remain at relatively low levels and strong top-line growth has led to burgeoning corporate cash balances, supporting renewed corporate investment in capital equipment.
- Mergers and acquisition activity has also boomed, partially enabled by growing pools of private capital seeking larger and larger deals.
The economy continues to be strong with low unemployment, high industrial production, and good productivity growth. The Federal Reserve is likely to stay hawkish on the inflation front, and we expect investment grade fixed income to turn in coupon type performance. We remain positive on the outlook for equity markets, and marginally more so on international as global growth prospects appear to be a bit stronger than domestic.
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