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Like most questions, the answer depends on whom you ask. We are fortunate here at Investment Advisor in that we have not one expert to consult, but nine wise members of our monthly asset allocation panel. Among these nine experts and their colleagues, analysis of the same data sometimes leads to different conclusions. For the most part, the panelists were guardedly optimistic.

Generally, there is a consensus that inflation will be mild and that the impact of energy prices, while it may place some drag on the economy, will not necessarily be as bad as had been feared. “Crude oil is going to come down steadily, and that will help the economy and will help cool off inflation fears,” says SunGard’s Gail Dudack. “This will also allow P/E multiples to expand rather than contract as they have done throughout 2005.”

Most of our panelists indicated that the continued growth in productivity and GDP would offset the potential for inflation, thus causing the Federal Reserve to stop raising rates at some point under 5%. It’s also collectively believed that the dollar will be strong relative to other currencies.

Potential negatives include the bursting of the residential real estate bubble, or at the very least a leveling off of the dramatic increase in home prices of the last few years, which could force some over-extended speculators into selling into a crowded and declining market. There’s also the continued uncertainty about energy prices and interest rates, which are the big ifs for 2006.

As they say about opinions, everyone’s got one. Following are our panelists’ educated opinions on the outlook for this year. We’ve also included a chart showing their predictions of a number of major economic indicators, as well as one showing how on the money they were at this time last year. Knowing advisors’ penchants for taking the long view, we’ve also included data tracking predicted and actual inflation for the last 15 years.

Lincoln Anderson, LPL Financial

“I think it will be a pretty good year,” says LPL’s managing director and CIO, displaying his typical optimism. “I don’t see us running out of running room here on the expansion. There may be a little bit of a drag from energy prices if they stay this high, but not enough to kill theexpansion.”

As Anderson sees it now, 2006 will finish with GDP having a 3.5% to 4% boost and the creation of some 1.5 million jobs. Although there’s been a great deal of talk about interest rates, he’s not that concerned. He points to a core inflation rate of 2% and an overall inflation rate of 4%, the difference between the two being driven by the dramatic surge in the cost of energy. “I look at that and ask, where are we going to go next with energy in 2006? My guess is that energy prices will be flat or down,” he ventures. “I could be wrong, but I think the odds are better for an energy price decline than for further rises.”

In terms of stocks, he’s of the opinion that the economy will shift from a consumer-led expansion to a business-led expansion, but a continued expansion nevertheless. “That means you’ll see a lot more inventory investment, a lot more business fixed investment, and more technology investment. I think the sector that should do well in that is technology, which has not done all that well lately.”

The areas he finds least attractive are cyclicals that did well in 2005–precious metals, materials, and energy.–Robert F. Keane

Mark Balasa, The Alpha Group

There’s good news and bad news for equities in 2006, reports the Alpha Group’s Mark Balasa. “There has been a reduced risk premium for stocks in the last several years,” he says. “That is going to continue.” Despite that trend, he expects the markets to improve slightly by the end of 2006, with the Dow closing at 11,800, the S&P at 1,350, and the Nasdaq finishing off at 2,450. GDP will end 2006 at between 3.5% to 4%, he adds, while inflation will steady at 3%.

“Large growth stocks have been beaten down for the better part of five years,” he explains. “We feel that it is large growth’s turn to take off, but not by an enormous margin.” Small internationals should fare slightly better in 2006, Balasa continues. “This asset class has been taking off for the last several years, but there is still room for improvement.”

Balasa suggests pulling away from commodities as well as small value. “Commodities are going to do poorly while small value is going to fall apart and be at the tail end of the pack.”

He adds that the political state of the nation will have some effect on the financial markets. “War affects the psychology of investors, especially if it is not going well,” he explains. “If the political turmoil is figured out, that will begin to gradually help [investor confidence].”–Megan Fowler Robert

Richard Bernstein, Merrill Lynch

Expect meager returns from equities in 2006, reports Savita Subramanian, a strategist with Merrill Lynch, speaking on behalf of IA panel member Richard Bernstein. She expects all asset classes to be relatively flat with single digit returns. “Strategists are overwhelmingly bullish in equities [for 2006],” she explains. “That is usually a contrary indicator. When a herd mentality or group think forms in the equity market, it is typically already priced into the market.” As a result, she says “returns on capital will be highest in areas where capital is scarce.” However, “every asset class has had record inflows of capital [in 2005], so returns on all asset classes [in 2006] are going to be meager.”

She is of the opinion that all returns are going to be similar this year and suggests that investors reap the benefits of diversification, but stay away, however, from foreign-exposed sectors such as technology. “Technology has the highest percentage of foreign sales of all 10 sectors,” she says. “There is a negative relationship with earnings in this sector to a strengthening dollar.” The U.S. dollar is up 12% or 13% year-to-date, and will end 2005 with 15% appreciation, she suggests. This sector sells heavily in foreign currency and “the translation is going to hurt.” Finally, housing prices will stagnate in 2006 and emerging markets will share the pain with the U.S. consumer. “Our overall view is that the housing market will not implode but it is going to slow,” she says. “People have been using their houses as ATM machines through refinancing.” That will end, and the decrease of consumer spending will have a negative impact on the global economy.–Megan Fowler Robert

Gail M. Dudack, SunGard Institutional Brokerage, Inc.

SunGard’s Chief Investment Strategist feels 2006 is going to be a strong year, predicting the Dow will finish off 2006 at 11,600, the S&P will end at 1,420, and the Nasdaq will close at 2,520. “1,420 is a strong target for the S&P,” she says. “That is a 13% gain from where we are now and is doable on simple valuation.” Dudack believes the driving force behind the increase will be oil.

Industrials, healthcare, and technology are the three industry groups she anticipates will perform best in 2006. “Healthcare is an area that grows faster than GDP,” she explains. “It has been under the cloud of big-cap pharmaceuticals, but it will begin to do well.” Industrials will also perform well and will retain high earnings. Dudack advises staying away from staples and consumer durables, however. Consumer stocks will be handicapped by a stronger dollar and consumer spending leveling out at a lower but still robust pace, she explains.

“That is a problem for staples as they are truly global, and global [sectors] have an earnings translation risk.”

Over all for 2006, Dudack says profit margins will be the key to successful investing. “A stronger dollar will pressure consumer staples/durables’ profit margins, but the economy, the dollar, and the stock market will do better than most people expect, especially in the first half of the year.”–Megan Fowler Robert