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Spokane, Washington  Est. May 19, 1883
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Look for a strong economic start in 2006

Ernie Ankrim Special to The Spokesman-Review

In both 2004 and 2005, stocks began uncertainly, but ended in a two-month winning spurt at the end of the year. I believe that the opposite might happen in 2006 and that the best news for the equity markets will occur sooner rather than later.

The ingredients might well be the same, however. Much of what hurt the markets in the first part of 2005 might return to hurt them in the second part of 2006. And much of what helped the markets perform well in the latter days of 2005 might, I believe, help them in the first few months of 2006.

Here’s why I’ve reached that conclusion.

When 2005 began, investors in stocks were casting a wary eye on threats to the market. So much so that those threats – rising oil prices, higher interest rates, inflationary trends and fears of terrorism – caused them to pull back from stocks for most of the year.

Only in the last two months of the year did they buy into the market with any enthusiasm as the threats diminished.

I believe that 2005’s enthusiasm, rather than disappearing, might extend into 2006, particularly should we see an end to the Federal Reserve’s interest-rate increases. But later in the year I expect to see that confidence peak and begin a slide toward the end of 2006.

Why? What will happen to turn off consumers?

First, I expect we’ll see a slowdown in housing demand as federal regulators clamp down on high risk mortgages, reducing the ability of consumers to finance their expenditures by borrowing on home equity. For the first time in five years I expect we will see no appreciable increase in home equity through 2006, and this could have a dampening effect on consumer consumption.

It is also possible we could see higher oil prices later in 2006 after a relatively favorable beginning to the year. Driving the possible turnaround might be continued growth in China, which continues to assert a larger influence on marginal global demand. Not only might the price of oil start firming again as 2006 closes, but other commodity prices might continue their upward trends as well.

At the same time, I believe that federal deficits and an end to rising short-term interest rates should stop the rising exchange value of the dollar. While this may not be significant early in 2006, as the year progresses a weaker dollar and sustained demand for commodities might start putting upward pressure on import prices.

As we close out 2006, nominal rates might increase, driven by inflationary realizations and expectations, even if the Federal Reserve does not respond by raising rates.

So, as a result, as we reach the last part of the year I expect we could see earnings comparisons suffering, consumer expectations starting to wane and stock price momentum starting to suffer.

The market might hold on to its gains and not slide precipitously downhill, but in the second part of 2006 I expect we won’t see the strong gains we experienced in 2004 and 2005.


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