A new year always brings with it a familiar buzz about the hottest stocks, the latest must-have investments, and the easiest way to make a quick buck. But as most seasoned investors know, fad fancies rarely pan out in the stock market. Crystal ball aside, here’s a look at what investors might expect in 2006.
Economic Growth
The economic expansion should continue in 2006, although not quite as quickly as in recent years. The Congressional Budget Office forecasts that gross domestic product (GDP) will rise 3.7 percent in 2006, compared with estimates of 3.8 percent in 2005 and 4.4 percent in 2004, according to the Congressional Budget Office.
At the same time, corporate earnings are expected to increase by 9.4 percent. Economists believe this increase will pave the way for businesses to continue adding an average of 180,000 jobs a month through the first half of 2006, keeping unemployment at a low 5 percent by May 2006, says the Wall Street Journal.
Interest Rates
Economists also agree that short-term interest rates may continue to rise in 2006, although perhaps not as often as they did in 2005. Long-term rates may also climb. Higher rates could put a damper on housing prices and may affect consumer spending.
During the past year, the net worth of households rose by nearly $4 trillion, partly because of higher house prices. If prices fall, individuals may become less willing or able to spend. Most economists agree that housing values are likely to soften in some markets.
Retirement Planning
This year will also give investors a greater opportunity for tax-deferred retirement saving. Contribution limits on 401(k) and 403(b) plans will rise to $15,000 a year, and workers 50 and older can save an additional $5,000 in catch-up contributions. Although regular contribution limits for IRAs are still $4,000, the catch-up limit will rise to $1,000 a year (compared with $500 in 2005). Note that distributions from most employer-sponsored plans and traditional IRAs are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10 percent federal income tax penalty.
Although the pace of economic growth may cool slightly in 2006, many experts are optimistic about longer-term trends.