It could be back to normal for the stock market in 2007 -- almost.
At least that's what a group of local investment advisers think 2007 will wind up being, with gains approaching a slightly below-average 8 percent for both the Dow Jones industrial average and the Nasdaq Composite Index.
If they're right -- and our panel was too cautious in their forecasts last year -- then the coming year could be another solid, yet unspectacular, year for investors.
"Goldilocks lives for another year," said Lawrence V. Whistler, the chief investment officer at Nottingham Advisors, an Amherst money management firm, referring to an economy and a stock market that aren't too hot or too cold.
Of course, our panel of advisers didn't see this year's rally coming on as strongly as it did, predicting only that the market would produce about the same gains they're expecting for next year -- 9 percent for both the Dow and Nasdaq. In reality, the Dow is up 15 percent for the year through Friday and the Nasdaq has jumped by 9 percent.
"We may have robbed some of next year's gains," said Joseph Curatolo, the president of Georgetown Capital Group, an Amherst investment advisory firm.
Buoying the advisers' optimism is the belief that the economy will keep growing slowly, while interest rates could recede a bit and inflation will stay in check.
"Inflation is behaving itself. Interest rates are behaving themselves. Housing is bottoming out," said David Elias, the president of Strategic Advisor, an Amherst money management firm.
"The balance tips a little toward growth," said Gerald T. Cole, the managing partner at Arbor Capital Management, an Amherst money management firm.
"We should have a pretty good economy next year," said Cole, who expects the Dow to rise by 11 percent and the Nasdaq to jump by 13 percent.
Those trends also should help prop up consumer spending, while corporate profits will continue to grow.
"The combination of more normal earnings growth and a better bond market will help support stocks," said Ronald M. Roche, the senior portfolio manager at Robshaw & Julian Associates, an Amherst money management firm.
But the overall pace of that growth may slow slightly. Whistler and Roche, for instance, expect single-digit earnings growth, instead of the double-digit gains that have been common in recent years.
"I would expect the economy to slow down, which is what you'd expect after 17 consecutive interest rate hikes," said Whistler, who is the panel's most pessimistic forecaster, looking for 5 percent gains in both the Dow and Nasdaq.
The advisers also see companies that, by and large, continue to be awash in cash, which could give them the funds to fund mergers, a surge in stock buybacks or higher dividends. All of that would be good for share prices, said Rosemary A. Ligotti, senior vice president at Cantella & Co. in Buffalo.
"Corporations have a ton of money on hand," said Curatolo, who shares the distinction with Elias as the most optimistic local advisers, with identical forecasts of a 12 percent jump in the Dow and a 15 percent gain for the Nasdaq.
Those dividends could be especially appealing to investors wary of slowing economic growth, which in turn could be the key to spark the long-predicted switch away from riskier small and mid-sized company stocks to the large company shares that have lagged for most of the decade.
"There's real value to be had in large-cap stocks," Cole said. "Large-cap stocks are due to have a stronger-than-average year."
Of course, making predictions is a dangerous game simply because so much can go wrong to derail forecasts that seem to make so much sense to the local analysts today. The war in Iraq and the growing unease about U.S. involvement there could weigh heavily on investors.
So could a continued decline in housing prices in some of the nation's overheated housing markets, which will slash the overall wealth of many investors who for years have relied on strong increases in housing values.
"It's hard to deny the effect of the housing slowdown," which will leave many investors in hot real estate markets with less equity to tap into and potential losses on recent home purchases, said Roche, who expects the Dow to rise by 6 percent and the Nasdaq to increase by 8 percent.
"That's going to have an incredible impact on people's retirement and savings and investments," said Ligotti, who expects the Dow and Nasdaq each to rise 6 percent to 13,175 and 2,600 respectively. "That could have far-reaching tentacles."
Interest rates also could start to drop a little as inflation remains in check and economic growth slows, says Bruce Kaz, the president of Courier Capital Corp., a Buffalo money management firm. He thinks the yield on 10-year Treasuries could slide to around 4.5 percent. Whistler thinks the Federal Reserve could start cutting short-term rates by mid-year.
Beyond that, those factors also could make investors more willing to put a higher value on stocks, essentially paying a higher price for each $1 in earnings per share that a company generates. "An expansion of price-to-earnings ratios will allow the markets to continue moving higher," said Kaz, who sees the Dow rising by 9 percent and the Nasdaq jumping by 10 percent.
Despite the high-profile weakness in housing and the auto industry, consumers continue to be willing to open their wallets and keep buying, which helps keep the economy humming. "People are going to continue to spend," says Anthony J. Ogorek, who runs Ogorek Wealth Management, an Amherst money management firm, who expects the Dow to rise by 9 percent, but sees just a 5 percent gain by the technology-laden Nasdaq.
"Technology is a tough industry to be in now because of the pricing pressure," he said.
Several advisers predicted major changes in the trends within the market that have driven prices higher since 2002. They see a shift away from the small-to-mid-sized company stocks that have fared very well in the latest rally, in favor of the big company growth stocks that started to break out of their six-year slump in 2006.
"They're way behind the market," Elias said.
History also could be on the market's side in 2007, Ligotti said.
The third year of a presidential term typically is the strongest of the four-year cycle, with stocks averaging a gain of 10.6 percent dating back to 1833, according to the Stock Trader's Almanac.