Going into 2006, there was much to be pessimistic about for the U.S. economy and the stock market in general. The full scale of the damage from Hurricane Katrina was becoming apparent, coming in at over $80 billion in damages. Oil prices were at all-time highs. And there was much uncertainty over geopolitical events.
With all of this negativity in the air, investors didn't have much to look forward to in 2006. Because of the resilience of the United States economy, GDP still improved more than 3% for the year, the S&P 500 gained more than 11%, and even the Steelers managed to win the Super Bowl. Of course, everyone knew that once the Steelers won the Super Bowl, the rest of the year was bound to be a good one, since the S&P 500 has gained an average of 26% (dividends included) in the years that the Steelers won the big game.
Since the Steelers (sadly) won't be going to the Super Bowl in 2007, how the market performs in this coming year is a little less certain. Even without this almighty prognosticator, though, there are some signs that 2007 may shape up to be just as good a year for investors as 2006 was.
It's the economy, stupid
Even though economic growth and the general well-being of people don't necessarily go hand in hand, when the economy grows, corporate profits and the stock market also grow. Therefore, looking at macroeconomic indicators can often be indicative of future stock market returns.
This year, the Organization for Economic Co-operation and Development predicts that GDP within the U.S. will grow 2.4%. Initially, this doesn't sound like much to get excited about, but it's only one sector -- new-home construction-- that is holding GDP growth back, with a whopping 14% decline expected. Luckily, the rest of the U.S. economy is predicted to perform much better (with exports expected to be up 6% as an example), and the other large economies of the world, including Japan and the European Union, will push global GDP growth up to the very high 5% level next year, according to the International Monetary Fund.
Since many corporations in the U.S. have operations spanning throughout the globe, manufacturing giants like General Electric
One of the biggest reasons why I'm bullish on 2007 is the way that the stock market and corporations have responded to the higher oil prices that occurred in 2006. Without a doubt, the biggest near-term risk to most companies and the world economy going forward are sudden oil-price shocks. One would have thought that a 50% rise in oil prices in 2005 would have put a damper on investor returns last year, but company after company still recorded record profits, and consumer price growth was a measly 2% for the first 11 months of 2006. This tells me that U.S. businesses are more resilient to sudden macroeconomic shifts and less leveraged to increased raw-material costs than previously, as when the oil-price shock of the 1970s caused the U.S. economy to fall into a painful recession.
Prices so low you can't say no
Even if you don't have faith that 2007 will be another solid year for the economy, ye olde value investors can take heart in knowing that the S&P 500 is sporting a trailing-12-month P/E ratio well below its 25-year average of 20 and is also giving a nifty 1.6% dividend yield. With indices like the S&P 500 trading at flea-market bargain valuations, you don't have to worry as much about the economy, as invariably, there will be numerous individual companies just waiting for value hounds to sniff them out.
There's an old adage about economic forecasting being like trying to drive a car blindfolded while someone looking out the back window gives directions. Because of these obvious difficulties in trying to predict the future, most economists don't even bother giving forecasts for how the economy will perform in the coming years. Nevertheless, with macroeconomic and geopolitical risks abating, I'll place my bet that 2007 proves to be another immaculate reception for investors, and that those who stay invested in stocks will have another MVP year.
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article.