by Archie M. Richards, Jr.
January 1, 2007

In my column a year ago (1/2/06), I said that, "2006 and 2007 are going to be excellent years for stocks. What happens in early-2006 I don't know. But beginning in the latter half of the year, the market will rise big time."

Well, 2006 may not have been an "excellent" year, but it was certainly above average. In July 2006, the Dow, at 10,800, was about the same as it had been at the end of 2005. It then spurted up to 12,463, for a gain of 16.3 percent for the year (not counting 1.8 percent dividends).

The Nasdaq Composite fell about 10 percent to the July 2006 low and then rose smartly to close the year at 2415. The rise for the year was 9.5 percent.

Predictions like this should make no difference in your investment program. If you act on the guesses of self-important market gurus, you'll end up poorer. True, I haven't been wrong yet about the market's direction, but I will be some day.

Even when I'm right, market timing is perilous. For example, let's say you held cash for the first half of 2006 because you figured I was bearish (which I was). But from January to May, the market rose smartly. You'd have said to yourself, "Archie's timing is probably going to be wrong. I might as well get in."

Whoops, you'd have bought at the top. In June, the market suffered a panic bottom, fell further, rose, and then plunged again in July. The pressure and the losses would have made you feel you were losing a boxing match. Investment anxiety and self doubt makes everyone vulnerable to selling in bad markets.

Let's say you sold at the July bottom. After the market rose, you might have thought, "I'll just stay out and see what happens."

Another bad move. The market rose big. You can always see what has happened. But price trends never tell you what's going to happen.

In the short term, Ms. Market is an angry, energetic, castrating young tyrant. But in the long term, she's a doddering old woman who follows meekly behind the world's creation of wealth. Therefore, just buy when you get the money, rebalance annually, and hold for life.

All right, here we go for this year:

I expect market weakness in the first couple of months of 2007. But overall, we'll see excellent gains for the year, worldwide. Here's why:

• 2007 is the third year of Mr. Bush's presidential term. The third year is generally the best of the four for stocks. Since 1943, there have been 16 third years. In not a single one did the market fall. It rose only 5 percent in two of the years. In the other 14, the gains were double-digit.

  Foreign markets did well, too. In the third years of U.S. presidential terms since 1943, the Morgan Stanley World Index gained an average of 20.5 percent.

• The forward earnings yield on stocks (the estimated earnings on S&P 500 stocks, divided by the prices) remains higher (6.4 percent) than the interest yield on 10-year Treasuries (4.7 percent). Normally, the forward earnings yield is lower than the interest yield. The last time the earnings yield was higher to the current extent was around 1980, just before a multi-year climb in stocks.

• The financial conditions of corporations and households are healthy. Corporations are starting to take on more debt, but not to a dangerous extent. Real estate's weakness won't spill over to everything else.

• Mergers, acquisitions, and corporate buy-backs of the company's stocks are at high levels, which is bullish.

• A gridlocked Congress will pass few important bills. A good thing, too. The less government does, the less damage it causes.

The vulnerabilities:

1. Hedge funds are too much of a fad.

2. China has too much debt, too many empty skyscrapers, and too many environmental problems.

Nevertheless, it's going to be an excellent year worldwide. Happy New Year!