2007 Predictions (part 2)

Management will be key in 2007. Those companies which can outperform their rivals and adjust to changing economic and market conditions will appreciate dramatically in 2007, while the bulk of publicly-traded companies will skirmish with health care, distribution and marketing issues.

Stocks in general will perform poorly, however, and some will fail outright. A correction is fairly due in the near term, most likely in the first two quarters of 2007, though either sharply rising prices or range-bound fluctuations are equally possible. There has not been a 10-15% correction in the Dow for the entire length of the current bull market, which has now extended to 51 months.

The Dow has just completed its 4th consecutive year of positive returns and 2006 was the best year in the past three. It's not surprising that stocks have accomplished such sparkling gains considering the healthy profit scenarios and rather loose policy guidelines over recent years.

What is surprising is how the markets have behaved with rigid resolution during a time of high deficit spending, a poor balance of trade and the general malaise associated with the conflict in Iraq and the poor US foreign relations policy. Falling currency values must have contributed to higher share prices over this period. Foreigners have, in relation to dollar-denominated assets, more money to boost stock prices, and they certainly have. One could assert that stocks must rise just to stay even with the falling value of the US dollar.

Continued loose policy on many fronts, including the Fed's rate policy could lead to a hyperinflationary environment, but that's all about to change. The shifting politics in Washington should foment positive movements on fiscal policy, foreign relations and spending. A conclusion in Iraq is overdue and calls for an end to US military involvement in the Middle East will only grow louder if the conditions remain the same or worsen.

It's going to be a year of transition in which strong internal management will not only profit but lead into a more balanced and dynamic market. With that in mind, a 15% rise on the Dow would put the average at 16,675, a number that not only seems unrealistic, and probably is. Don't expect the Dow to cross much higher than 16,000 at some point in 2007, but be reminded that a pull-back in the first half will make such a move all the more daunting.

To say that every rally climbs a wall of worry is to speak loudly of this current bull. Sustaining the edge during a transition will not be easy for traders or investors. Expect a cyclical change in sector leadership, and small emerging technology companies in computing, agriculture, medicine and energy will perform very well and many will be takeover targets.

Large value companies, like those comprising the Dow, will continue to diversify to meet changing demands and become even more entrenched in their respective business sectors. That's all positive news for US stocks and 2007 will present quality buying opportunities. The underground, or unseen, economy will continue to thrive and feed into the mainstream at an unprecedented rate. Cash and credit are circulating and growing remarkedly; a condition that must be approached and understood to be cautionary.

2007 will experience political disruptions more often than economic ones. The world's currency exchange system, precarious as it is, has now interpreted globalization effects and accommodated. While areas of fragility will persist, no cataclysmic events can be seen looming and those problem areas such as inflation and disparities in markets will be met with policy action. Areas outside the US will almost certainly afford better returns, though with the associated higher risk. Established foreign firms based in stable nations should be given a hard look.

Expected gains are 7% on the Dow, 12% on the Nasdaq and 5% on the S&P 500 at year end, though the range, especially the lows, could be dramatic.