Wall Street ended a painful year with another steep loss on Monday as investors glumly anticipated that this year would bring more of the uncertainty and turbulence of last year.
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 last year with a respectable increase of 6.43 percent -- not as large as the 16.29 percent 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 the new year 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 November existing home sales rose 0.4 percent to an annual rate of 5 million -- the first rise in nine months. However, sales are 20 percent below where they were a year ago, and the median existing home price has dropped 3.3 percent 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 on Monday. 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 dollars 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 US$4.4 billion this month from a Singapore fund, which bought a 9.9 percent stake in the US brokerage.
The Dow fell 101.05, or 0.76 percent, to 13,264.82. The blue-chip index remains below its Oct. 9 record high of 14,164.53, at which point it was up more than 13 percent 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 percent, to 1,468.36, to end the year with a gain of 3.53 percent. It had reached a record close of 1,565.15 on Oct. 9.
The NASDAQ fell 22.18, or 0.83 percent, to 2,652.28, to finish the year with a 9.81 percent 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 percent from 4.12 percent late on Friday, and is down nearly 17 percent 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.
Last year 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 2006. 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 realized that the ongoing slump in housing and a rise in mortgage foreclosures because of resetting on 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 "subprime" comprised only about an eighth of the US$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 US 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 writedowns. 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 pummeled stocks. The Dow suffered triple-digit drops, the Russell 2000 index of smaller companies fell 5.73, or 0.74 percent, to 766.03 on Monday. The small-cap index finished the year down 2.75 percent.
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