Wall Street ended a painful year with another steep loss on Monday as investors glumly anticipated that 2008 would bring more of the uncertainty and turbulence of 2007.
The Dow Jones industrials fell 101 points, the latest in a string of triple-digit moves that became commonplace in the just-ended year amid a continuum of bad news about housing, faltering mortgages and shrinking credit. Thanks to a big first-half advance, they managed to finish 2007 with a respectable increase of 6.43 per cent – not as large as the 16.29 per cent jump in 2006, but a better performance than the modest loss in 2005.
The Dow’s annual gain came even after it posted its worst fourth-quarter drop in 20 years, amid billion-dollar losses at the world’s biggest financial firms and falling spending by consumers whose budgets have been crimped by record-high oil prices and declining home prices.
“Considering all that’s going on, the market really acted pretty well,” said Todd Leone, managing director of equity trading at Cowen & Co.
It’s tough to say what the primary market driver of 2008 will be, but the stock market faces a slew of threats: more adjustable-rate mortgage resets, a still-tight credit market and the possibility of accelerating inflation. But Leone said the fourth-quarter earnings season in January should shed some light on how US companies are surviving the recent slowdown and credit crunch.
There was more downbeat news on housing on Monday. The National Association of Realtors said in November that existing home sales rose 0.4 per cent to an annual rate of 5 million – the first rise in nine months. However, sales are 20 per cent below where they were a year ago, and the median existing home price has dropped 3.3 per cent over the past 12 months.
Falling home prices have made it hard for struggling homeowners to refinance their mortgages, and the slump in construction activity has hurt homebuilders and other housing-related industries.
Still, there were some slivers of optimism. The UK’s Observer newspaper reported on Sunday that Merrill Lynch & Co was in talks over the weekend to line up capital from investors in China and the Middle East in exchange for portions of the Wall Street firm.
Merrill, like many other financial houses, has seen its portfolio lose billions of dollar in value due to misplaced bets on mortgages. And as Citigroup Inc, UBS AG, Morgan Stanley and Bear Stearns Cos have done, it has turned to investors in Asia for much-needed capital; Merrill has already gotten $4.4 billion this month from a Singapore fund, which bought a 9.9 per cent stake in the US brokerage.
The Dow fell 101.05, or 0.76 per cent, to 13,264.82. The blue-chip index remains below its October 9 record high of 14,164.53, at which point it was up more than 13 per cent year-to-date.
The Standard & Poor’s 500 index and the technology-dominated Nasdaq composite index also declined on Monday, but both posted annual gains for the fifth straight year.
The S&P 500 index fell 10.13, or 0.69 per cent, to 1,468.36, to end 2007 with a gain of 3.53 per cent. It had reached a record close of 1,565.15 on October 9.
The Nasdaq fell 22.18, or 0.83 per cent, to 2,652.28, to finish the year with a 9.81 per cent gain. Despite the market’s volatility, this was the best performance for the Nasdaq, still well below its tech boom highs, since 2003.
Government bonds rose. The yield on the benchmark 10-year Treasury note, which moves opposite its price, slid to 4.03 per cent from 4.12 per cent late Friday, and is down nearly 17 per cent for the year.
Declining issues narrowly outnumbered advancers on the New York Stock Exchange. Consolidated volume came to a light 2.38 billion shares, up slightly from 2.31 billion on Friday.
2007 was a remarkable year on Wall Street. The market began the year continuing the rally that propelled the Dow above 12,000 for the first time in October. Then, in late February, came a reminder that stocks were capable of turning tail and plunging; a skid on China’s stock market and an ominous economic outlook from former Federal Reserve chairman Alan Greenspan sent the Dow down 416 points in one day.
That panic didn’t last long. In April, the Dow barreled above 13,000 for the first time and then glided past 14,000 in mid-July. But in late July, however, the market realised that the ongoing slump in housing, and a rise in mortgage foreclosures due to resetting adjustable-rate loans, was taking a toll across the credit markets.
Though the housing market started teetering as early as 2005, few people anticipated how much the downturn could affect the global financial system. Mortgages given to borrowers deemed “sub-prime” comprised only about an eighth of the $10 trillion US mortgage market – why would that rattle the world markets?
The problem was, these pieces of debt were chopped up, repackaged and woven into larger fixed-income instruments, on which banks and other investors made billion-dollar bets – bets that were extremely profitable during the housing boom, but calamitous when borrowers couldn’t keep up with their mortgage payments. When one slice of the instrument defaulted, it pulled the whole thing down with it.
Investors bailed out of anything tied to mortgages, and soon Wall Street discovered that financial institutions in the United States and overseas were holding billions of dollars in assets that were losing value by the day. The biggest names on the Street – Merrill Lynch, Citigroup Inc, Bear Stearns Cos – announced billions of dollars in write-downs. Merrill and Citi lost their CEOs, and several financial firms sought out billion-dollar investments to clean up their balance sheets.
In the midst of this turmoil, the credit markets all but seized up, and all these interconnected events pummelled stocks. The Dow suffered triple-digit drops, recoveries and then drops again as Wall Street stumbled through months of volatility reminiscent of the terrible days after the 2001 terror attacks.
In August and September the Federal Reserve began to act, with interest rate cuts and injections of liquidity. It helped for a while, and in October, stocks were rallying again, taking the Dow to another set of record highs – only to succumb again to fears about the unknown extent of the credit mess.
Wall Street enters 2008 with that same concern, not to mention oil’s surge this year of about 60 per cent to nearly $100 a barrel, and the US dollar’s tumble to record lows against the euro. On Monday, the dollar rose against most other major currencies, gold prices fell, and crude oil prices slipped two cents to settle at $95.98 a barrel on the New York Mercantile Exchange.
“We’ve seen the return of volatility. I think that will be around for a while, and will govern trading for the new year,” said Scott Fullman, director of investment strategy for I. A. Englander & Co. “Stock selection and strategy will play a very important part in the success of anybody who is trading going into the new year. This is not a time where you throw a dart at the board.”
In 2007, the technology, energy, industrials and healthcare sectors did well, while the financial industry and small-caps – usually fledgling companies that rely heavily on loans to grow their business – lagged.
The biggest gainer among the 30 Dow components was Honeywell Inc, with an annual rise of 36 per cent, and the biggest loser was Citigroup, with a loss of 47 per cent.
The Russell 2000 index of smaller companies fell 5.73, or 0.74 per cent, to 766.03 on Monday. The small-cap index finished the year down 2.75 per cent. (AP)
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Wall Street wraps up 2007 in a somber mood