Surprises for 2006

6. After the 50-basis-point increase in the fed funds rate and an uneventful January in the markets, stocks drop abruptly, then quickly rally back. However, a conspicuous slowdown in retail sales hits equities again, and stocks only recover half of those losses.

The rise in commodity prices and the CRB Index (affected by political unrest in South and Central America and a rise in agricultural prices due to a terrorist act) bring the DJIA down to the 9000-9250 level in early summer, where it settles in for the balance of the year, though another sharp year-end rally brings the DJIA back to about 10,000 by year-end.

Volatility during this period rises dramatically -- the S&P 500 routinely has 2% daily moves, acting more like a commodity than a stock index. Mutual fund inflows drop precipitously.

7. With confidence in the markets and economies deteriorating, merger-and-acquisition activity slows to a crawl. One large private-equity firm returns over $5 billion to its investors.

8. The best-performing equity strategy in 2006 is short selling; the worst is aggressive growth (long only). The junk-bond market records its worst performance in over a decade and underperforms almost every asset class in 2006. The cable stocks, old media and high-yielding stocks (like regional telecom companies) are among the best sectors. General Motors(GM Quote - Cramer on GM - Stock Picks) muddles through and ends the year with a gain of 25% (leading all other components of the Dow Jones Industrial Average) after Steve Miller (with financial assistance and the managerial support of Wilbur Ross) takes over the helm in a broad management shakeup.

Coca-Cola (KO Quote - Cramer on KO - Stock Picks) is a close second (buoyed by more stock purchases by Warren Buffett), and Verizon (VZ Quote - Cramer on VZ - Stock Picks) is the third-best performing member of that index. On the downside, the popularity of the exchanges (Chicago Mercantile, International Securities Exchange, Nasdaq Stock Market Inc., Chicago Board of Trade, etc.) wanes, and the stocks lead most sectors to the downside in 2006.

9. Corporate profits for 2006 are flat, decelerating sharply from the 7% increase recorded in first-quarter 2006.

10. The U.S. dollar's strong momentum and new paradigm bullishness in 2005 yields to weakness in 2006. As trade tensions mount with China (which in turn fails to ante up on its continued financing of U.S. consumption), inflation abruptly rises (within the context of supply disruptions) and the focus comes back to the U.S. current account deficit (reaching $900 billion or 6.9% of GDP in 2006) and a stagnating economy as a consequence of reduced confidence in the president.

The current surge in tax revenue, which produced a reduction in the federal deficit, is reversed as tax-revenue growth normalizes back toward that of nominal GDP. Contributing to an expanding deficit are the Medicare prescription drug plan; spending on unmet infrastructure needs; the Homeland Investment Act (which encouraged repatriation of foreign profits to be taxed at low rates); hurricane rebuilding efforts;a pickup in bonuses (and other nonstandard income); and the normalization of individual nonwithheld and corporate taxes (both having previously benefited from a rising stock market and an increase in the value of homes, which served to increase capital gains).

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