URL http://query.nytimes.com/gst/fullpage.html?res=9C05E3D91430F934A35752C0A9619C8B63

DATE/ AUTHOR None	AUTHORS: Paul J. Lim

H Will This Bull Ever Retire?

S1 IF 2006 proved anything, it's that aging bull markets don't have to die simply because they're old, or that they must quietly fade away.

S2 Given enough of a dose of economic growth, corporate profits and cheap capital, a bull market that's more than four years old -- as this one is -- can still rage on like a young buck.

S3 That was certainly what mutual fund investors discovered last year.
S4 Emboldened by an economy that proved resilient in the face of Federal Reserve interest-rate increases, high oil prices and a cooling housing market, the average general domestic stock fund gained 12.8 percent last year.

S5 Among all stock funds that invest in domestic equities, including single-sector portfolios, the average gain was even better: 13.4 percent, according to Morningstar, the mutual fund tracker.

S6 To be sure, this was shy of the return of 15.8 percent for the Standard & Poor's 500-index of blue-chip stocks, which had its best year since 2003.
S7 But it was a surprising improvement from 2005, when domestic stock funds gained 7.7 percent, on average, and looked to be tiring.

S8 Many people on Wall Street say the market's momentum could last well into this year.
S9 And in at least one respect, history is on the market's side.
S10 Since 1945, the S.& P. 500 has never declined in the third year of a presidential term, according to Sam Stovall, chief investment strategist at S.& P. And the average gain for equities during these years has been 18 percent.

S11 As has been the case throughout this decade, the equity markets caught a much-needed second wind in the fourth quarter, which drove the Dow Jones industrial average and the Russell 2000 index of small stocks to record levels late last year.

S12 According to Morningstar, the average domestic stock fund surged 6.9 percent in the quarter, marking the sixth consecutive year-end rally for stocks.

S13 What propelled stock prices higher this time?
S14 For starters, data released late in the year ''put to rest all the extraneous worries about the economy,'' said James Swanson, chief investment strategist at MFS Investment Management in Boston.

S15 In the spring, concerns that the Federal Reserve may have done too good of a job of slowing the economy threatened to tame the bull market.
S16 In fact, a growing number of economists began to worry about the possibility of a recession on the horizon.

S17 As a result, stocks ran into a proverbial wall of worry in the spring and early summer.
S18 From May 5 to June 13, the S.& P. 500 slumped 7.7 percent, its worst slide since the bear market earlier this decade.
S19 For the entire second quarter, the average domestic stock fund lost 2.8 percent.

S20 But as it turned out, the economy -- and consumers, for that matter -- proved stronger than expected.
S21 Moreover, oil prices stabilized and the Fed all but said that it was done raising short-term interest rates for now.

S22 ''Once investors were no longer worried about recession, they were willing to jump back on the risk train,'' said Thomas W. McDowell, chief executive and chief investment officer at Rice Hall James, an investment management firm in San Diego.

S23 He's not kidding.
S24 In the fourth quarter, investors, whom many analysts thought would embrace relatively conservative assets like blue-chip domestic stocks, went back to their speculative ways.

S25 AND they were rewarded handsomely for their risk taking.

S26 Within the fixed-income world, for example, the average emerging-market bond fund rose 4.9 percent in the fourth quarter and 11.1 percent for the year.
S27 High-yield bond funds did nearly as well, posting quarterly gains of 4.2 percent and annual returns of 10.3 percent.
S28 By comparison, the average bond fund that invests in long-term debt issued by the United States government rose just 0.1 percent in the quarter and 0.6 percent for the year.

S29 The picture was much the same in the equity markets.

S30 The average diversified emerging-market stock fund, for example, soared 17.4 percent in the quarter and finished the year up 32.6 percent, according to Morningstar.
S31 The best-performing fund category was Latin American stock portfolios, which posted gains of 21.5 percent for the quarter and 45.2 percent for 2006.

S32 On the domestic front, many of the same sectors that have been leading the markets in recent years dominated again in 2006.
S33 Precious-metals funds, for instance, rallied 32.2 percent for the year and are now up 33.7 percent, annualized, over the last five years.
S34 Real estate and utilities portfolios also soared, posting average gains last year of 34 percent and 25.5 percent, respectively.
S35 And thanks in part to the recent wave of mergers and acquisitions, financial sector funds rose 16.4 percent, on average.

S36 Despite predictions that this would be the year when large-cap domestic stock funds returned to dominance, small-cap stock funds again led the domestic markets among general domestic stock funds.

S37 According to Morningstar, the average small-cap growth fund advanced 11.1 percent last year, versus 7.3 percent for the average large-cap growth portfolio.
S38 And while large-cap value funds outperformed their small-cap counterparts for the full year, they trailed small-cap value funds in the fourth quarter.

S39 ''This appetite for risk has me a little worried,'' Mr. Swanson said.
S40 He asserted that investors aren't simply expecting a so-called soft landing in the economy -- in other words, the avoidance of a recession.
S41 ''The market is bracing for the plane to circle and take off again -- and I think that's too optimistic,'' he said.

S42 Another reason that speculative investments are doing so well is that despite 17 interest-rate increases since June 2004, ample liquidity continues to slosh around the global financial markets.

S43 ''Right now, there's still too much money chasing too few financial assets,'' said Stuart A. Schweitzer, global markets strategist at J. P. Morgan Asset and Wealth Management.

S44 James W. Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, agreed.
S45 ''This is the only time in postwar history where a recovery has taken place without any rise in long-term borrowing costs,'' he said.

S46 He noted that yields on 10-year Treasury notes were virtually unchanged from June 2004, when the Fed began its tightening cycle in an effort to slow the economy and tame inflation.

S47 Until this changes, Mr. Paulsen argues that the markets will continue to be led by small-cap stocks that are economically cyclical.

S48 He is in the minority.
S49 A vast majority of money managers and market strategists are banking that investors will regain interest in large-cap stocks as attention turns to the slowing economy and corporate profit growth later in the year.

S50 Indeed, a recent survey of money managers by the Russell Investment Group showed that investors were more bullish on large-cap growth and large-cap value stocks than they were on small-cap growth and small-cap value shares.

S51 And in general, investors are anticipating a fifth consecutive positive year for equities.
S52 Yet bull markets rarely survive to this age.
S53 In fact, of the last 14 bull markets in domestic equities, only four lasted five years or longer.
S54 And the average bull lived only 3.7 years, according to InvesTech Research.

S55 According to the Russell survey, 8 in 10 investors believe that domestic stocks will have another positive year in 2007.
S56 And a third are predicting gains of at least 10 percent, in part because of a slowing-but-still growing economy and a possible rate cut by the Federal Reserve.

S57 But all of this bullishness has some market watchers nervous.
S58 ''There's certainly less pessimism today about 2007 that there was a year ago,'' Mr. Paulsen said.
S59 While that may be good news for investor confidence, he added, ''it means the risks in the market are higher.''

S60 FOR instance, what if corporate profit growth -- estimated at 15.5 percent last year, versus 13.7 percent in 2005 -- slows more than expected?
S61 Mr. Schweitzer points out that six months ago, Wall Street analysts were expecting corporate profits among S.& P. 500 companies to jump 10.5 to 10.75 percent in 2007.
S62 ''Now, the latest forecasts are for growth of a little more than 9 percent,'' he said.
S63 While this is none too shabby, ''the ebbing of corporate profit growth expectations may continue in 2007 and unsettle investors,'' he said.

S64 At the very least, Mr. Schweitzer said, the worrisome degree of optimism among investors means that ''the chances of a bumpy ride on Wall Street are quite high.''

S65 MUTUAL FUNDS REPORT

