NEW YORK – Wall Street on Friday closed out a year that will be remembered for the stock market’s great comeback: a year-end rally that pushed the Dow past 12,000 for the first time.
Major indexes were slightly lower Friday, but the Dow and the Standard & Poor’s 500 index finished 2006 with double-digit percentage gains. The technology-heavy Nasdaq was up 9.5 percent for the year.
By all accounts, 2006 ended a very good year for stocks as bullish investors bounced back from a slumping housing market and the Federal Reserve’s two-year campaign of interest-rate increases. The markets approached record levels in the spring, pulled back sharply in the summer, but found a clear direction in the fall to send the major indexes to multiple-year highs.
Blue chips were the standouts of 2006. The Dow Jones industrial average, the index of 30 of the nation’s biggest companies, hit record levels dozens of times since achieving its first close above 12,000 on Oct. 19; it traded
This was the best year for the stock market since 2003, when Wall Street staged a massive recovery from levels sideswiped by a bear market.
But 2006 will really be remembered for the market’s soaring to heights not seen since the height of the dot-com era – this time, however, Wall Street advanced cautiously, not recklessly.
The rally was fed by investors’ growing belief that the economy has withstood well the Fed’s rate increases and the impact of record high oil prices. And some analysts expect the advance to continue.
“The stock market is correct in its judgment that we are probably only in the fifth or sixth inning of the game, and that this (economic) expansion may even go into extra innings,” said Stuart Schweitzer, global markets strategist for JPMorgan Asset & Wealth Management. “This was a barn-burner of a year, and I expect reasonably solid results over the course of 2007.”
On Friday, the Dow fell 38.37, or 0.3 percent, to 12,463.15. Broader stock indicators also slipped. The Standard & Poor’s 500 index fell 6.43, or 0.5 percent, to 1,418.30, and the Nasdaq composite index closed down 10.28, or 0.4 percent, to 2,415.29.
The major indexes posted healthy gains for the year, with the Dow Jones industrials rising 16.3 percent, the S&P 500 adding 13.6 percent, and the Nasdaq up 9.52 percent.
That’s the best showing since 2003, when the Dow closed up 25.3 percent, the Nasdaq rose 50 percent, and the S&P 500 gained 26.4 percent.
It wasn’t just the stock markets that made significant gains in 2006.
The bond market moved in lockstep with stocks. Investors bought into equities because of a strong economy and robust corporate confidence. Meanwhile, typically more conservative bond investors used the fixed-income market as a hedge for a possible recession and interest-rate cuts.
This year was also a bit of a rule bender for Treasuries. Yields on long-term Treasury notes and bonds were lower than for short-term Treasury bills. Junk bonds were in such demand that their yields were on almost on parity with those of investment-grade bonds.
Bond prices slipped in Friday’s session; the yield on the benchmark 10-year Treasury note, which moves in the opposite direction, rose to 4.71 percent from 4.69 percent Thursday. The yield stood at 4.37 percent on the first day of trading this year, and was over 5 percent just a few months ago.
The dollar, which has struggled against the euro and other major currencies, was mixed Friday. The U.S. currency lost support in 2006 after the Fed stopped raising rates Aug. 8 and kept them unchanged in its past three meetings.
And gold prices continued their rally; investors have sent precious metals sharply higher, viewing commodities like gold and silver as safe-haven investments instead of the greenback.
Plunging oil prices also fed the stock market’s 2006 rally. Crude reached all-time highs in the summer when it briefly surpassed $78 a barrel because of the resilience of consumer demand and expectations of a bad hurricane season. But energy prices plummeted back to 2005 levels by the fall when traders saw that refiners in the Gulf of Mexico were untouched by hurricanes and realized global crude inventories remained ample.
That retreat gave momentum to the stock market’s rally and enabled investors to tolerate upward blips in the price of crude and gasoline.
The price of a barrel of light sweet crude Friday rose 52 cents to settle at $61.05 on the New York Mercantile Exchange – about 22 percent below its highs of the year.
Stocks are expected to rise further in the new year, but not without some resistance. A big question still hanging over the market is whether the Fed will feel comfortable enough with the balance between inflation and a moderating economy to start lowering interest rates. If inflation seems to be accelerating, an interest-rate increase could still be in the offing.
“There is going to be a tug of war between the bulls and the bears as we head into next year,” said Quincy Krosby, chief investment strategist for The Hartford.
“We could hit a speed bump as Treasury market yields grow higher, and that could put pressure on the stock market,” she said. “We need to pay close attention to the Fed, and how they view what I believe is going to be a growth spurt that will be manifested by yields moving up.”
She also pointed to fluctuations in the dollar as another greater influence on Wall Street. Rising interest rates in Europe could help the region lure foreign investment away from the United States, further pressuring the dollar next year.
There was little corporate news Friday as traders looked toward a four-day break that includes a suspension of trading Monday for New Year’s Day and Tuesday for the funeral of former President Gerald Ford.
Trading was thin – typical of the week between Christmas and New Year’s.
The Russell 2,000 index of smaller companies dipped 6.82, or 0.9 percent, to 787.66. For the year, the Russell 2000 rose 17 percent.
