Transcripts

The Last Trading Day Disappoints But Doesn't Discourage

SUSIE GHARIB: No champagne rally on Wall Street today. Stocks slipped in the final trading day of the year, but most of the major averages were still up double digits for 2006. The Dow lost 38 points closing just below its record high for the year. The NASDAQ fell 10 points. Suzanne Pratt takes a look at the best rally in three years and where stocks go from here.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The 2006 stock market is likely to be remembered for its surprising strength after a very shaky start. Not only did the Dow Jones Industrial Average end the year in record territory, but it has rallied about 1,800 points since July. Market pros credit a resilient economy, the Federal Reserve and declining oil prices for investors' enthusiasm for stocks this year. Portfolio manager Jim Awad says sentiment turned decidedly positive in the third quarter.

JAMES AWAD, PORTFOLIO MANAGER, AWAD ASSET MANGEMENT: People got comfortable with the economy, got comfortable with inflation and got more optimistic about the prospects for profits. And, it was really much better than most people had predicted in the beginning of the year.

PRATT: All of the major indexes ended the year well on the plus side, although the small cap Russell 2000 index led the pack. That trend, however, is not expected to extend into next year. While most market strategists are forecasting another positive year for stocks, they expect large caps to dominate. Many predict gains of about 5 to 10 percent for the major averages, as M&A activity and appealing valuations will make it hard for investors to ignore stocks in 2007. Julius Baer strategist Brett Gallagher believes stocks will sell off early next year, but says private equity cash will help underpin the market.

BRETT GALLAGHER, HEAD OF U.S. EQUITIES, JULIUS BAER INVESTMENT MGMT.: There are a number of fundamental factors that are supporting the market. One of the biggest being the private equity funds that have been raised, roughly $170 billion this year. We've seen some pretty big deals of late, but they've still only managed to spend over half of the funds raised.

PRATT: Experts say there are, however, definite risks for stock investors in 2007. Some pros are concerned about inflation spiraling higher, forcing the Fed to hike rates and derailing the stock market. Others are worried housing will slump further, perhaps pushing the economy into recession. They say those bipolar economic risks could mean a choppy 2007.

AWAD: There are going to be times when the market is worried about the economy being too weak. Then there are going to be other times when the market is worried about the economy being too strong and what does that mean for interest rates. So there will be down month. There will be down days. There will be down weeks. It's not going to be a straight up market.

PRATT: Straight up or choppy, the key point for investors is that most experts believe 2007 will ultimately be an up year for stocks. If that happens, that will make the fifth straight up year for the S&P 500. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.

SUSIE GHARIB: One additional note regarding Wall Street tonight. Most major financial markets will be closed on Tuesday, out of respect for former President Gerald Ford, whose funeral is Tuesday. The NYSE, the NASDAQ, American and Chicago Stock Exchanges will all be dark. The Federal Reserve will also be closed and the bond markets are expected to have a shortened trading day. Wall Street has a long history of closing on the day of a national funeral, dating back to the burial of President Ulysses S. Grant, in 1885.