Moderate inflation, stable interest rates and strong corporate profit growth resulted in broad based stock gains in 2006. The S&P 500 index advanced 13.6%, the NASDAQ 9.5% and the Russell 2000, representing smaller companies, did even better with a 17.0% increase. Telecom, energy and utilities were among the best performing sectors. The worst performing groups included healthcare, technology and consumer goods. Interest rates increased somewhat. The yield on the ten-year government bond advanced to 4.71% from 4.39% at the beginning of 2006.
Economic growth moderated from an annualized rate in excess of 5% in the first quarter of 2006 to 2% in the third quarter. Home building and related industries is the primary weak spot, while auto sales are soft and industrial production has slowed. Consumer confidence, however, has recently improved and consumer spending is showing continued growth due to stable oil prices, job growth, wage increases and a rising stock market. Our outlook for 2007 is for GDP growth of 2.5%, modestly higher long-term interest rates, stable short-term rates, inflation in the area of 2.0% and corporate profit growth in the mid single-digit range. There are two risks to our outlook. First, a significant decline in housing prices causing trouble in the mortgage market. Second, an international crisis that restricts the supply of energy, pushing up substantially the price of oil and related products.
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Economic growth moderated from an annualized rate in excess of 5% in the first quarter of 2006 to 2% in the third quarter. Home building and related industries is the primary weak spot, while auto sales are soft and industrial production has slowed. Consumer confidence, however, has recently improved and consumer spending is showing continued growth due to stable oil prices, job growth, wage increases and a rising stock market. Our outlook for 2007 is for GDP growth of 2.5%, modestly higher long-term interest rates, stable short-term rates, inflation in the area of 2.0% and corporate profit growth in the mid single-digit range. There are two risks to our outlook. First, a significant decline in housing prices causing trouble in the mortgage market. Second, an international crisis that restricts the supply of energy, pushing up substantially the price of oil and related products.
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