Sage Advice Quarterly Market Review 4Q2006

As advertised, the midyear slowdown extended through the third quarter, with real GDP expanding by a miniscule 1.6% annual rate during the period, the slowest since the first quarter of 2003. Now, the real debate begins. At issue is whether the economy limps into 2007 at the below-trend rate of the past two quarters, or receives a jolt of energy that will catapult it into a fresh stage of vigorous growth. Needless to say, the outcome has vastly differing implications for inflation, the financial markets and monetary policy. Most economists, including us, believe the Fed has ended its two-year rate hiking campaign and will start to cut rates sometime next year in response to subpar growth and receding inflation. That view is far from unanimous, however; many feel that after a hiatus of six months or so, the Fed will resume its tightening strategy as the economy rebounds and heightens inflationary pressures.