Zaks Investment Advisory Service

On performance of financial markets in 2006

In our last program of 2006, we discussed economic and financial forecasts for 2007. And in our first program of 2007, I would like to take a look back at what happened to the markets in 2006.

Let us begin with stocks. Dow Jones, probably the most famous of all the indexes, gained 16.3 percent and set several records over the year. Many of us remember that during the boom of the late 1990s, the Dow Jones average grew quickly, as did the rest of the market, and on January 14, 2000 reached 11,723 points. That record close held until October 3, 2006, when the Dow Jones average closed the day at 11,727. It took Dow Jones almost seven years to beat its old record. But things did not stop there, and several days ago, on December 27, the index reached 12,510.

The sophisticated listener could ask: but what about inflation? After all, 11,723 at the start of 2000 and now are far from the same thing. This is a completely reasonable point that should be taken into account. On the other hand, one should also remember that the stocks that make up the index also pay a dividend. Dividends increase the shares’ overall return. Between 2000 and 2006, dividend payments averaged to about two percent of the share price. In order to compare the index levels in 2000 and 2006, both of these factors need to be taken into account. If we recalculate the index’s rise while compensating for both inflation and dividend payments, it will turn out that the Dow Jones index is still in record territory.

The same may not be said of the broader S&P 500 index. In contrast to Dow Jones, which consists of only the 30 largest companies, the S&P 500 index is made up of the 500 largest companies. In the course of 2006, this index rose 13.6 percent, which by the way, is higher than its average growth rate for the previous 80 years. Nevertheless, the index is still will off its record, which was set on April 24, 2000. Taking both inflation and dividends into account, the S&P 500 needs to grow another 17 percent or so in order to reach its record level. It would not bad at all if it managed to do this in 2007.

The NASDAQ index had the greatest success of all during the booming 1990s. It is mostly comprised of smaller companies, many of which are involved with the Internet and other high-tech industries. During the market fall that stretched from about mid-2000 to 2003, NASDAQ suffered more than the other indexes. So how did this index perform in 2006? NASDAQ also grew, but not as much as the Dow Jones or the S&P 500 indexes – by just 9.5 percent. Since the companies that compose NASDAQ pay almost no dividends, this figure represents the index’s total gain for 2006. This is barely half of the full return earned by Dow Jones. NASDAQ finished the year at 2,415 points. On March 10, 2000, it closed the day at 5,049. So, talking about new NASDAQ records is a bit premature.

But what about bonds? Lehman Brothers collects information about all sorts of different bonds: those issued by our Treasury, by private corporations, municipalities, foreign governments, etc. They’ve created several corresponding indexes. The broadest index covering US bonds is the so-called US Aggregate Index. In 2006, it delivered a return of 4.3 percent. This, of course, is less than the return on stocks, but many investors still purchase bonds in order to diversify their portfolios.

The past year was a very successful one for many countries of the world. Many exchanges even flourished in Europe, where the economy, as we have already mentioned, is growing slower than in the United States. Morgan Stanley collects information about the performances of many international indexes. It averaged the European Union data and learned that EU markets returned almost 19 percent, if counted in the common euro currency. And since the dollar fell in 2006, then in dollar terms, the Common Market exchanges showed a gain of 33 percent. The emerging markets grew almost as fast: 25.5 in the local currencies, and 29 percent in dollar terms. The Chinese market gained 78 percent.

And few more interesting figures: by mid-2006, oil reached the price of $78 per barrel. But if we look at how oil prices performed for the year, then we discover that oil lost about seven percent: it cost $65.51 at the start of the year, and $61.05 at the end. The price of gold, on the other hand, grew from about $530 to $636. But all potential investors should keep in mind that the price of gold has not reached the levels of 1979-80. And that is without inflation taken into account.

And finally: we will still not know for some time about how real estate prices changed in 2006. However, we do have data for the end of the third quarter: prices gained less than 0.9 percent for the quarter. But because prices grew quickly in 2005, the figure is 7.7 percent higher than for the end of last year’s third quarter. Most likely, this figure will be smaller for the whole of 2006.

And with this, we will draw today’s program to a close. This was Sergey Zaks. Thank you for your attention and until next time.

Dow Jones:
End of 2005: 10,717
End of 2006: 12,463
Previous record: 1/12/2000, 11,723
New record: 12/27/2006, 12,510.
Dividend yield 2000-2006: approximately 2%

S&P 500
End of 2005: 1,248
End of 2006: 1,418
Previous record: 4/24/2000, 1527
New record:
Dividend yield 2000-2006: approximately 1.6%

NASDAQ:
End of 2005: 2,205
End of 2006: 2,415
Previous record: 3/10/2000, 5049
New record:
Dividend yield 2000-2006: approximately 0%

Wilshire 5000 (total market):
End of 2005: 12,518
End of 2006: 14,258
March 23, 2000: 14,734
Dividend yield 2000-2006: 1.4% (estimate)

Average Bond Return, 2006: 4.3% (source: Lehman Brothers)

Information on International returns provided by Morgan Stanley/Barra

Inflation 2006: 3.2 (preliminary estimate)

Inflation 2000-2006: 2.76% (source: the Federal Reserve Bank of St-Louis)