Many signs point to the underlying strength of the overall economy. The adage of "focusing on long-term" investing can test the patience of any investor, especially during periods of market volatility. The last twelve months proved no different as investors experienced periods of both positive and negative market momentum. Investor optimism appears to have strengthened as energy prices have moderated from historic highs and the broader economy continues to show signs of resiliency. Overall GDP growth remains strong, manufacturing activity is expanding and unemployment is at its lowest level over the last 4 ½ years.

Key Market Drivers:
Investors carefully monitor the forces and influences that potentially change the financial and economic environment and consequently drive the direction of the overall markets. The New Year begins with investors looking ahead at the catalysts that will shape and define the markets over the coming year.However, for some investors January 1 denotes a "new" beginning, when in fact it is simply a continuation of what has developed in recent quarters. During 2005, we highlighted and discussed a series of key market drivers that directly influenced the stock and bond markets as well as the overall economic environment. Many of these key drivers remain the same as we look forward to the next 12 months. We believe that the domestic economic environment, consumer and corporate spending, politics, monetary policy, energy costs, and interest rates will best define how positive an investment environment is experienced in 2006.

Monetary Policy and Interest Rates:
Once again, the Federal Reserve will play a key role in shaping the market environment as we move through 2006. The Federal Reserve continues to adjust interest rates upward and effectively manage investor expectations as it focuses intensely on containing inflation and maintaining economic growth. The policy making body has increased the short-term lending rate 13 times over the last two years. The Federal Reserve directly influences short-term interest rates, but its ability to influence longer-term rates is accomplished through managing investor expectations regarding inflation. Consequently, the structure of the yield curve has flattened with short-term rates rising faster than longer-term rates. Given a moderate outlook on inflation and the current strength of the economy, it is likely that the Federal Reserve is close to the end of the rate increasing cycle and we could even see a decline in rates by the end of the year.

2006 will also bring about change for the Federal Reserve policy makers, specifically, a change in the leadership structure, which has captured the attention of all market participants and observers. The nominee to fill Chairman Allan Greenspan's position is Ben Bernanke, who was the former Chairman of the Economic Department at Princeton University and currently sits on the U.S. President's Council of Economic Advisers. Historically, Mr. Bernanke focused his efforts and economic philosophies around inflation targeting, or establishing a predetermined level of inflation that is deemed acceptable and then adjusting monetary policy accordingly to reach that target. Investors appear to accept Mr. Bernanke as a solid replacement for Chairman Greenspan.

Inflation:
Inflation will be a key market driver in 2006, specifically as it relates to energy prices, commodity costs, and areas of limited capacity. Supply constraints and increasing demand will continue to influence energy markets. Over the last year, we have carefully documented the impact of rising input costs on individual companies, specific industries and sectors, and the broader economic environment. Higher input costs can exert pressures on corporate profit margins unless companies can offset these increased costs by enhancing their productivity and/or passing along these increased costs in the form of higher prices. Even with the higher energy prices and higher commodity costs over the last several quarters, inflation appears to be under control and economic growth remains in place. Unless there are unexpected shocks to the economy, inflation should remain in the 2-3% range through 2006.

Political Environment:
Historically during the mid-term elections, which will take place in November 2006, the incumbent party loses seats, which will directly impact tax policy. It is inevitable that the political rhetoric will reach a fevered pitch as we move through the summer months and into the fall. The political incumbents and their challengers will debate and spar on an array of social and economic issues. A level of uncertainty is usually accomplished with the spread of mis-information and/or conflicting information. The misinterpretation of economic facts and trends, and the creation of a negative environment will add a dynamic to the investment landscape in 2006 that the investing public will be forced to wade through. An additional factor influencing the markets will be the progress made in ending the Iraq conflict through the reduction of troop levels, which will boost investor confidence and enthusiasm.

Asset Allocation:
In previous Investment Perspectives, we have introduced our Strategic Asset Allocation Model, a tool, which measures the relative attractiveness of stocks versus bonds as an asset class. Over the last several years, the asset allocation tool favored common stocks over fixed income investments primarily because of the low interest rate environment. While short-term bond yields continue to rise, this asset allocation tool indicates that we should remain positive about investing in common stocks. This tool, combined with strong corporate financial health and solid macroeconomic growth, indicates a relative attractiveness for common stocks. Consequently, the investment community will continue to focus on companies that are paying increasing dividends to enjoy further the tax-advantages dividend-paying companies provide to a portfolio.

Outlook:
Given the positive underlying economic growth and momentum, the equity markets should produce 7-10% returns over the coming year, which is consistent with historic total returns. Bonds are likely to experience a 5-6% total return. Furthermore, the New Year brings with it an opportunity for investors to re-orient themselves with their investment goals and objectives. Maintaining a long-term focus is critical to the success of any investment strategy. Taking advantage of future growth opportunities in the marketplace involves adhering to solid portfolio management principles, maintaining a consistent investment strategy, and creating effective, broadly diversified portfolios.