Two Trends That Will Continue in 2006, and One that Won't

Searching for Alpha, the monthly index newsletter for January 2006

For those that survived the year that was, some congratulations are in order. After living through the bird flu scare, horrific natural disasters, and an inverted yield curve, one must wonder what the next twelve months hold.

Investors will likely see a number of familiar themes in 2006. Last year ended a six-year winning streak for small-cap stocks over their large-cap rivals, and considering the late stage economic expansion the U.S. economy is currently experiencing, this trend should continue. Smaller stocks are now more expensive, and have less earning momentum, than larger issues, which leads me to believe that equity investors will be better off concentrating on stocks with large capitalizations.

Investors are also likely to see continued dominance of foreign stocks. As international bourses fought for leadership in equity returns in 2005--Europe's Dow Jones Stoxx Index rose 24% in 2005, outpacing a 22% gain in the Morgan Stanley Capital International Asia Pacific Index--the S&P 500 index registered a paltry 3% increase. While the return differentials may not be as dramatic in the New Year, I do think that U.S. markets will not lead in 2006. The main drivers for foreign outperformance include increases in global expansion, which should continue to boost international commerce.

And as for a trend that won't continue, I believe that the Fed will finally stop raising interest rates in 2006. With borrowing costs high enough to keep inflation contained, lower energy prices, and some questions about the strength of earnings, fixed income strategies should regain some of the luster they lost in 2005.

Of course, we have many things for which to be thankful. We were once again spared a terrorist attack on our sovereign shores last year. We live in a country that allows us to worship freely and improve our lot in life. And Americans once again showed their capacity for giving as they generously contributed to such causes as the Asian tsunami and Hurricane Katrina.

Best wishes for a happy andprosperous new year.

The Monthly Index Report for January 2006

Index

Dec-05

QTD

YTD

Description
S&P 500 Index*

-0.10%

1.59%

3.00%

Large-cap stocks
DJIA*

-0.82%

1.40%

-0.61%

Large-cap stocks
Nasdaq Comp.*

-1.23%

2.49%

1.37%

Large-cap tech stocks
Russell 1000 Growth

-0.31%

2.98%

5.26%

Large-cap growth stocks
Russell 1000 Value

0.61%

1.28%

7.05%

Large-cap value stocks
Russell 2000 Growth

-0.15%

1.60%

4.15%

Small-cap growth stocks
Russell 2000 Value

-0.77%

0.67%

4.71%

Small-cap value stocks
EAFE

4.66%

3.90%

14.02%

Europe, Australasia & Far East Index
Lehman Aggregate

0.95%

0.60%

2.43%

U.S. Government Bonds
Lehman High Yield

0.86%

0.68%

2.74%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

-0.82%

0.96%

3.55%

Managed Futures
3-month Treasury Bill

3.13%

All returns are estimates as of December 31, 2005. *Return numbers do not include dividends. ** Returns are estimates as of December 29, 2005
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