As usual, I don't place too much emphasis on this sort
of forecast, but to the extent that I make any comments at all about the outlook for 2006, the bottom line is this: 1) we can't rule out modest potential for stock appreciation, which would require the maintenance or expansion
of already high price / peak earnings multiples; 2) we also should recognize an uncomfortably large potential for market losses, particularly given that the current bull market has now outlived the median and average bull, yet at higher valuations than most bulls have achieved, a flat yield curve with rising interest rate pressures, an extended period
of internal divergence as measured by breadth and other market action, and complacency at best and excessive bullishness at worst, as measured by various sentiment
indicators; 3) there is a moderate but still not compelling risk
of an oncoming recession, which would become more
of a factor if we observe a substantial widening
of credit spreads and
weakness in the ISM Purchasing Managers Index in the months ahead, and; 4) there remains substantial potential for U.S. dollar
weakness coupled with «unexpectedly» persistent inflation pressures, particularly if we do observe
economic weakness.
On the
economic front, I believe that the most consistent interpretation
of the data is that
of an economy that is generally deteriorating, but where the
weakness in leading
indicators hasn't filtered through to the most lagging ones.