The following is the S&P 500 chart in 2006.
*Read the entire history of the U.S. stock market here.
In terms of political/economic events and crisis, 2006 was a rather quiet year. The S&P tends to rally strongly during quiet years.
Stock market investors were clearly focused on oil in 2006. Rising oil prices caused rising inflation. Some market participants feared stagflation, which is a situation in which inflation rises while the U.S. economy slows down. Oil fears were continuous from the beginning of 2006 to July 2006 when oil prices soared. These fears abated from July 2006 to January 2007 when oil prices fell.
Our model was able to predict the small 8% correction from May 5 – June 14. Our model knew beforehand that this would be a small correction and not a big one. There was no particular news attached to this correction.
The Case-Shiller index for U.S. house prices peaked in June 2006. The index would be down 2% from the beginning to end of 2006.
The Federal Reserve stopped hiking interest rates in July 20016 because that’s when oil prices stopped rising (so inflation stopped rising). When oil prices started to go up again in January 2007, the U.S. economy had deteriorated to the point where the Fed couldn’t raise rates.
There’s no clearer example regarding how badly the market lags the fundamentals. By September 2006, everyone realized that the U.S. economy was slowing down. The media was talking about it every day. However, most investors believed that the economy and market would be in for a soft landing as long as the Federal Reserve cut interest rates in early 2007.
By the end of 2006, several large mortgage bond issuers such as Ownit Mortgage Solutions and Sebring Capital went bankrupt (both in December) .