Closing Strong, Stocks Flexed Muscle in 2006
Year Ends With Markets Showing Biggest Gains Since 2003
By Michael S. RosenwaldWashington Post Staff WriterSaturday, December 30, 2006; Page D01
Wall Street strategists often employ metaphors to describe stock market performance, and 2006 provided plenty of options.
The best, perhaps, came from David Darst, chief investment strategist for Morgan Stanley Global Wealth Management, who likened 2006 to a football game with a scoreless first half, followed by a second half marked by multiple touchdowns.
Stocks came roaring back from a middling first six months to end 2006 with gains that far exceeded the expectations of many analysts and investors. The Standard & Poor's 500-stock index, which fell 6.43 points yesterday to 1418.30, climbed 14 percent for the year. The Nasdaq composite index, which dipped 10.28 points to 2415.29, gained 9.5 percent in 2006.
The
Dow Jones industrial average, which fell 38.37 points yesterday to 12,463.15, climbed more than 16 percent for the year and spent the fourth quarter notching one all-time high after another.
Fifteen strategists tracked by Bloomberg News had predicted an average rise of 8.2 percent for the S&P 500. In the end, Darst said, "I think the market put on a good showing."
Stocks were helped to their best year since 2003 by a host of factors: record corporate profits, falling oil prices, a halt to interest rate hikes by the Federal Reserve and a flood of deals that topped $4 trillion globally. Investors looked past a slumping U.S. housing market, softness in the U.S. manufacturing sector and concerns about global stability prompted by nuclear proliferation fears in Iran and North Korea.
"It was a year in which a lot of things were shrugged off that could have been upsetting," Darst said.
To many observers, the market certainly didn't look as if it would close with such a flourish. From the start of the year, stocks hummed along at a fairly modest clip, moving slightly up and down, with the S&P closing at 1325.14 on May 9 for about a 6 percent gain from the close of 2005.
But stocks then entered a six-week slide, marked by volatile trading. All major U.S. stock indicators and other global markets fell. The S&P 500 dropped 7.7 percent, hitting a low of 1223.69 on June 13, leaving it down for the year. The S&P recovered a little bit before falling again to 1234.49 on July 17.
Analysts gave varying reasons for the dip, but most agreed that high oil prices, which rose through the spring and peaked at $77.03 on July 14, were partly to blame. Those high oil prices stirred fears that inflation might jump out of control.
The markets began their comeback in midsummer. Oil prices began to decline from that July peak, eventually sliding to close below $60 a barrel in early October. In early August, the Federal Reserve stopped raising its benchmark short-term interest rate, ending 17 consecutive increases.
Third-quarter earnings forecasts started trickling in, proving to be stronger than expected. Standard & Poor's, for example, expects full-year operating earnings for 2006 to be the best ever, up nearly 15 percent over 2005.
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