After a weak 2005, traders can look forward to an end to rate increases

NEW YORK » Ever have a day when you wondered why you bothered going to work? Imagine how you'd feel if the whole year went that way.

Ask a Wall Street trader: Stocks' 2005 activity can be described by a nearly flat line. How can stocks escape from Nowheresville? The Street's big thinkers are eyeing each road out with a mix of hope and greed.

» Hope No. 1: The Federal Reserve stops raising rates.

Sure, interest rates are still near historic lows, although the Fed has raised them 13 straight times. But the march of rate hikes still makes equity investors twitchy. What if the Fed overdoes it and sends the whole economy grinding to a halt? Or what if rates get high enough that on-the-fence investors look at stocks and say, "Why risk it? I'll just buy a nice certificate of deposit."

Almost as good as the end of rate hikes would be a signal from the Fed that it is thinking of ending rate hikes, since uncertainty about the Fed's next move is on most days the Street's biggest worry.

"Once the Fed signals its intentions or investors perceive that the end is near, stocks might rise strongly," Ernie Ankrim, Russell Investment Group's chief investment strategist wrote in his year-end outlook.

» Hope No. 2: Everyone will share the Street's epiphany that large-cap stocks are undervalued.

In a Russell survey of 110 investment managers, 80 percent said they are bullish on the prospects for U.S. large-cap growth stocks over the next year.

Merrill Lynch's Richard Bernstein said, in a recent note, "One of our themes for 2006 is the possible return of deeply out-of-favor larger capitalization companies."

Some go even further: The whole darn market is a steal, they say.

Edward Keon, Prudential Equity Group's chief investment officer sent a note in October headlined, "Why am I still bullish and recommending 100 percent investment in equities?"

"Stocks are incredibly cheap at this time," he said. "We expect lower energy costs and lower inflation with a few months. With low interest rates and not many other strong investment choices, now is the time to buy equities."

» Hope No. 3: Energy costs and inflation really do decrease.

With lower energy costs and lower inflation, companies could pump more money into capital spending and consumers could stop worrying about filling the gas tank and focus on shopping.

» Hope No. 4: The housing market slowly deflates.

We're not talking about a dramatic burst, but rather a slow air leak. The housing market started zooming up as the turn-of-the-century stock bubble burst, which sent investors who were looking for double-digit returns away from the Nasdaq and toward Las Vegas condos. Day traders became real estate flippers.

But the housing market has a few things working against it. One is plain old affordability. Also, banks are under pressure from regulators to tighten their lending standards, which should decrease interest-only loans and adjustable-rate mortgages, making it harder for people with marginal finances to buy a house or condo.

» Hope No. 5: U.S. investors pull a little money out of foreign markets.

Americans have been building their investment in foreign markets since 2002. It's been a smart bet

many foreign markets have had more impressive returns than U.S. stocks. But every dollar that's outside the U.S. stock market is a dollar that isn't helping U.S. stocks.

» Hope No. 6: This one is the biggest. Everyone on the Street would much rather things stay boring rather than get worse.