Wall Street's obsession in the second half of 2006 will be the same as it was in the first: the Federal Reserve.

As everyone knows, the markets were whipsawed in the first half of the year as investors tried to get a read on newly installed Fed Chairman Ben Bernanke and his views on inflation and interest rates. Some days, it seemed the only thing that mattered to Wall Street traders was dissecting, interpreting and then dissecting again even the most banal utterances by Bernanke on inflation.

Stocks shot up whenever people believed Bernanke and his fellow Fed governors were poised to put the brakes on rate hikes. They fell just as hard whenever Wall Street sensed Bernanke & Co. were more concerned about keeping a lid on inflation than making nice with investors.

As the first half of 2006 came to a close, Wall Street was still unsure of Bernanke's plans for the rest of the year. But many bulls saw hope in the Fed's announcement last Thursday that it might be able to go slower on future interest rate hikes depending on economic events on the ground.

Of course, the Fed made those "friendly'' noises about future interest rates after voting to raise the Fed Funds rate for the 17th time in 17 straight meetings to 5.25% -- its highest level since March 2001. Expect the debate about Bernanke & Co. to rage on for the rest of the year, or at least until the Fed meets and actually doesn't raise rates for a change.

Away from the Fed, there's plenty for investors to watch in the next six months. Here are few things that could have just as big of an impact on stock prices in the coming months as Bernanke & Co.

Recession Watch

The prevailing view on Wall Street is that the economy, and stocks in particular, are poised to run higher again if only Bernanke & Co. get out the way. The conventional wisdom is that the economy is merely slowing down a bit, not stalling.

But the bearish camp, which believes an economic slowdown is just around the bend, has been slowly winning new converts. The bears are focused on the cooling of the housing market, rising oil prices and dwindling investor confidence. The bears argue that consumer borrowing has been driving economic growth, and that once the consumer starts spending less, the economy will falter.

To be sure, the economic doomsayers have been predicting the demise of the consumer for many years. But most had also predicted it would take a year or so for consumers to use up all the cash they had taken out of their homes during the mortgage-refinancing boom. The next six months could be telling.

Retail Sales

The surest way to tell if consumers are feeling a pinch in their personal finances is by looking at retail sales. And the second half of the year just happens to be the most critical period for retailers.

In the late summer and fall, clothing retailers bank on back-to-school sales to fill their coffers. The fourth quarter, of course, is the most important one for all retailers, as merchants look for a buoyant holiday shopping season to put them firmly in the black.

If the doomsayers are right, the first indication of trouble could come in the third quarter, when retailers tell us how the back-to-school shopping season is going. Third-quarter retail sales should be a good indicator of whether this holiday shopping season will be a merry one for retailers.

Election Watch

Nonpresidential elections generally generate little excitement, either on Wall Street or elsewhere. But this year's November general election could be critical, especially if the Democrats manage to regain control of at least one chamber of Congress.

A Democratic majority in either the Senate or House would put the final nail in the coffin of President Bush's legislative agenda. With Bush's approval rating hovering around 35%, his political muscle already is diminished.

No doubt, many in the country would cheer a Democratic victory as a necessary check-and-balance on the president and the Republican majority. On Wall Street, it would be viewed differently.

A Democratic victory would kill any attempt to privatize Social Security, an issue that's supported by many Wall Street investment firms. It also could imperil some of the tax cuts the Bush administration has enacted -- many of which have benefited the wealthy and corporations.

Finally, a Democratic victory in either the Senate or House could pave the way for congressional hearings into Bush's policies regarding the war in Iraq and the administration's domestic-spying initiatives. Congressional hearings into allegations of presidential abuse of power are not the kind of thing that inspires consumer confidence.

Corporate Mergers

The first half of the year has been a great one for corporate deal-making. Nearly $1 trillion in global deals were announced in the first half of 2006, up about 35% from a year ago. If the current pace holds, 2006 will come close to approaching the record-setting pace of corporate deals announced in 1999 during the height of the tech bubble.

Right now, few see any sign of a slowdown in corporate mergers and acquisitions. The bulls note that corporations are flush with cash, and that they either have to spend that money on acquisitions or buy back stock. Most are looking for another slew of corporate deals to be announced soon after Labor Day, when Wall Street bankers return to work.

A flurry of large deal announcements in September and early October would likely drive stocks and the broader market indices higher. Investors would interpret the news as a sign that U.S. corporate executives are still confident about the economy.

If those much-anticipated deals don't materialize, look for Wall Street to worry. A dearth of big deals, of course, would be bad news for Wall Street bankers counting on hefty bonuses. More important, investors and traders would see a slowdown in M&A as one indication of impending economic weakness.

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