Market Update

Mark Dossa, CFP®, Senior Portfolio Manager

Santa Claus flew over Wall Street in December but didn’t drop any presents leaving investors wondering what happened to the traditional year-end rally.   Continued weakness from financial and housing stocks kept buyers sidelined for much of the quarter.  As a result, the S&P 500 suffered its first negative 4th quarter return in 10 years.  After losing 4.18% in November, the index dropped .69% in December. 

On the bright side, even with all the turmoil generated by credit worries and the subprime mortgage meltdown, equities and bonds both produced positive returns on the year.  While the S&P returned a paltry 5.49%, well below the historical average of 10.4%, bonds moved up 6.97% (Lehman Brothers Aggregate Index).  The S&P 500 enjoyed its fifth consecutive year of positive returns while the small cap stocks making up the Russell 2000 dropped for the first time in 4 years.    

Crude oil prices jumped 58% and approached the lofty $100 per barrel mark.  Gold prices also moved higher on continued inflation fears while the dollar moved lower against most foreign currencies.  The Federal Reserve lowered interest rates twice during the quarter but the moves had little impact on equity prices over the three month period.  The yield on the 10-year Treasury dropped during the quarter as investors looked to the relative safety of bonds vs. equities.

Financial stocks and those related in any way to the real estate market were hit especially hard in 2007.  The housing slump turned out to be worse than most thought and has lasted longer than most projected.  Though we know we are closer to the end of the downturn we still can’t see the light at the end of the tunnel. 

Equity prices were quite volatile during 4Q.  The S&P 500 hit a high of 1,565 on October 9th only to see prices correct to 1,407 in early December.  The index rose to 1,515 mid-month only to retreat and close the year at 1,468.  Wild daily swings were not uncommon during the quarter as investors grappled with the constant barrage of economic news surrounding the housing slump and credit market meltdown.

Based on market activity in November and December, it is clear that Wall Street expects 4Q corporate profits in the U.S. to be weak.  Hopes are that profits will pick up in the 2nd or 3rd quarters of 2008, but much of that will depend on economic growth in the U.S. as well as other global markets.  

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