Some Barron's Thoughts

This week’s issue of Barron’s* highlights their 2007 outlook for the stock market based on the observations of Wall Street strategists. Collectively, the group is looking for stocks to rise about 7.4%, which translates to 1,520 on the S&P 500 and 13,220 on the Dow. Here are some other highlights from the article. {I have added some comments in Red}.

-Were the book to close today on 2006, the major indexes would have notched their fourth straight year of gains, with returns above the long-term average, at that. The Standard & Poor's 500 stock index is up 12.7%. {2005 booked a gain by a whisker with the average stock up about 2-3% last year. The average stock is up about 10% year to date.}

-More than 70% of active large-cap fund managers were trailing the market as of Oct. 31 {So are most hedge funds}

-All of this year's gains have come since midyear. {Specifically they've come since the Federal Reserve indicated that it was done raising interest rates in July}.

-This years gains so far has exceeded the forecasts of all but one of the Wall Street strategists surveyed by Barron's a year ago. {Watch for a major piece from us on investment performance and Wall Street Predictions before the end of the year}.

-Mark this the third -- or is it the fourth? -- straight year the consensus believes large stocks ought to reclaim the lead over small ones. Although there were hints that the market's largest issues were resurgent this past summer, the small-cap Russell 2000 again is besting the big-cap indexes -- however by a narrower margin.

-SO WHERE DOES THAT LEAVE investors? According to the Barron's Round Table, the financial system is overdue for an "accident" of some sort, given that some dislocation has accompanied each of the past three Fed-tightening cycles. The ingredients of excess -- hedge funds going public, mammoth buyouts on the rise -- are there, but haven't coalesced. Nor is the bull a kid anymore. Stocks are entering the fifth year of a bull market, one of the longest ever, and the second-longest free of at least a 10% drop. But as Birinyi Associates notes, in the three prior bull markets since 1962 that lasted through a fifth year, the fifth year was a good one, with average gains of 22%. That, among other things, could mean Wall Street's forecasters get it right again this year. Here's hoping so -- and happy new year.

*Source, Barron's Cover Story, "Polished Performance", Michael Santoli, December 13, 2006.