Stock Market Moves Higher and Housing Boom Nears Explosion in 2006

Editor’s Note: This is one part of a series of stories looking at the top stock market stories since 2000.

The business news in 2006 covered three major topics: corruption, China and the housing boom.

All three proved important for the remainder of the decade.

In the waning years of George Bush’s last term in office, these three topics played heavily defining the decade and the Bush presidency.

Scandals

One of the biggest scandals (if not the biggest) of the decade revolved around a lobbyist named Jack Abramoff.

It is safe to assume that few people outside the power circles of Washington knew who Abramoff was, much less the power he wielded.

As part of the inner circle of conservatives who controlled Congress, Abramoff made things happen for his clients.

Unfortunately, he didn’t always follow the rules and plead guilty to conspiracy to bribe lawmakers.

His scandal uncovered a web of influence pedaling and corruption that shocked many.

The Republicans lost control of the House in 2006, in part because voters demanded some changes in the status quo.

China

China continued to flex its muscle in the world economy and Chinese President Hu Jintao paid a visit to the White House.

The issue then (and now) was the devalued Chinese currency, which attracts capital and jobs.

This means Chinese goods are cheap compared to U.S. products and increases the flow of dollar to China.

This trade imbalance costs American jobs, however China remains the largest holder of U.S. debt and that gives them some leverage in trade talks.

Housing Boom

The housing boom, which was in full motion by 2006, was nearing the bursting point.

Cheap financing and “creative” loans put people in houses that were ticking financial time bombs.

The strategy was that housing prices were always climbing, so a low or no down payment loan was “safe” because the house would appreciate building equity.

As we were to learn, a significant number of the loans were outright frauds, where documents were doctored to qualify people for loans they couldn’t possibly afford.

A decades long push to get people into homes and out of rental units lead to policies that permitted the housing boom to expand and could not prevent it from bursting.

Deregulation and slack oversight in the financial services industry was fertile breeding ground for an out of control housing market.

Market News for 2006

The markets began moving after several years of relatively flat activity.

The Dow gained almost 2,000 points or more than 16% from the beginning of the year to the end.

The Nasdaq and S&P 500 witnessed more modest gains.

However, the real action was in the real estate market where homes were appreciating in the double digits.

What Did We Learn?

Observant investors were taking note of China’s emergence as a world economy power – its economy was growing at more than 10% per year.

Others sensed a climate for reform, in the ways of Washington, however, not much has changed.

The most important lesson of 2006 was missed by almost everyone, including the Federal Reserve Board – when a market (housing) is growing rapidly, it is prudent to carefully examine the underlying causes.

In the case of housing, cheap money and little if any supervision set the stage for disaster when lenders panicked.

Previous stories:

China's Influence in the Global Economy Grows in 2005

Stock Indexes Dull in 2004, But Gasoline Tops $2 per Gallon

Stock Market in 2003 Set Stage for Later Crisis

Deep Bear Market Begins to Turn in 2002

Attacks, Scandal Rock Stock Markets in 2001

Dot.com Collapse Heads Stories from 2000

Major Index Information for 2006