Economic Indicators - GDP Growth and Inflation
I'll defer to the experts at The Economist on this one. Their survey of experts suggests that the GDP growth rate will be around 3.2% next year and the rise in consumer prices will be around 3.0% in 2006. These figures are lower than what the final 2005 figures are likely to be, but not significantly so.
Interest Rates and the Federal Reserve
This one is a lot harder to get a handle on than last year, particularly since Bernanke is set to replace Greenspan. The Fed is set to meet one more time this year, on December 13th. They've raised the Federal Funds rate 25 points each of the 7 times they've met this year, causing it to rise from 2.25 to 4.00 percent, and experts expect it to be risen another 25 points on the 13th. I doubt it will be raised 8 more times next year, but it's quite possible it will exceed 5 percent, a level not seen since 2001.
A story making a lot of headlines this week is that gold has reached over $500 an ounce. Will this trend continue? It's tough to say, since the high prices are likely driven more by speculation than by economic fundamentals. Most commodities are poor investments which historically do not keep up with inflation. However, commodity prices can fluctuate wildly, so while I'd say the long run trend is for low commodity prices in real terms, in the next 12 months it's quite possible to see commodities such as gold and copper rise even higher.
In the August 28th, 2005 article Can We Expect $100 Barrels of Oil, I argued that, despite the talk in the media, it was very unlikely that we'd see $100 barrels of oil anytime soon. So far this is looking like a terrific prediction (unlike the one I made about the Canadian Dollar). Since August crude oil prices are down around 9.5%. Futures contracts for the summer months of 2006 are hovering around $60.00, and barring any natural disasters, that's where I expect they'll stay.
Housing Prices
This one is very, very tough, and there are very bright economists on both sides of the debate - some say that housing prices in some U.S. markets will experience a crash, others say that house prices may experience a slow gentle decline, while others still say that house prices continue to rise.
My own gut instinct tells me that housing prices will have to come down at some point and in some markets prices will crash, as they did in Toronto during the early 1990s. I bought a new house in London, Ontario, Canada 18 months ago and it's already increased 20% in value according to the local property tax authorities.
If housing prices do crash that's going to put a lot of pressure on municipal governments, as their revenues are related to the value of residential and commercial property. Also expect a wave of bankruptcies, as low property values and potentially high interest rates squeeze those with variable rate mortgages.
If I had any real certainty about what would happen to stock prices in 2006, I'd quit my job at About and spend my time trading futures and derivatives. My gut instinct says that we'll experience a year of slow but steady growth on most markets, since the economy is likely to experience another strong year. That is, of course, assuming that housing prices don't completely crash, as discussed above.
That's my take, but I'd love to hear yours! Please contact me by using the feedback form and let me know what you think!
