Choppy finish is likely for year on Wall Street
NEW YORK » Wall Street was populated by optimists this past week after a big rebound gave investors the hope that stocks might actually enjoy a year-end rally -- one that might even thrust the volatile Dow Jones industrials back over 14,000.
Improving prospects for another interest rate cut and signs that financial companies were finding solutions to their credit problems sent buyers piling back into stocks. The results were dramatic: The Dow, which plunged 240 points on Monday, shot up 628 points over the next four days, ending the week at 13,371.72.
But market veterans would warn, don't get ahead of yourself. Wall Street, battered the first three weeks of November, must contend with the still-unfolding turmoil in the mortgage and credit markets that has pummeled banks, mortgage companies and investment houses.
"The biggest fear is not knowing what the banks have on their books, and that's bigger than any economic news that might come out," said Scott Wren, chief economist for A.G. Edwards.
Major global banks have written down some $80 billion of securities tied to the subprime mortgage crisis, and there's an overwhelming worry that more is to come next year. Millions of adjustable-rate mortgages will convert to higher rates next year, and that has Wall Street concerned that banks and lenders are in for more pain.
"What do these guys have left to write down, and will credit be difficult to obtain in this economy when banks are afraid to lend to each other, to companies and individuals?" Wren said. "That's going to rule."
There was some hope this past week that the Bush administration is working with the financial industry on a plan to extend low introductory rates on some mortgages, heading off more defaults. Meanwhile, Federal Reserve Chairman Ben Bernanke hinted that another cut in the key interest federal funds rate is in the offing to keep the economy.
December is typically the second best month of the year on Wall Street, according to the Stock Trader's Almanac, and the fourth quarter is the year's best. The Standard & Poor's 500 index and the Dow have gained an average of 1.7 percent during the month since 1950. For the Nasdaq, December is the third best month.
But, following that pattern might prove difficult even if you strip out worries about the investment banks -- some of which begin reporting fourth-quarter results in a few weeks. The health of the economy is far from certain despite a robust gross domestic product report from the Commerce Department, which said Thursday that the broadest measure of the economy grew at an annual rate of 4.9 percent in the third quarter.
Consumer spending in the most recent data rose by only 2.7 percent. Expect that number to shrink as the housing slump continues, analysts said.
That could be troublesome, considering that consumers account for over two-thirds of GDP growth. But, it might be something the Fed can help out with at its rate-setting meeting on Dec. 11.
"You always want to give confidence back to the consumer, and that is usually a positive backdrop for equity prices," said Steven Goldman, chief market strategist for Weeden & Co. "If you go back to those levels of lower growth, and no inflationary concerns, then they are good times to buy stocks. And, if you look through history, interest rate cuts have been a good penicillin for stocks."
For the time being, investors should expect more volatility in the days ahead as institutional investors begin to position their portfolios for 2008. Big triple-digit swings in the Dow -- like the kind seen this past week -- are likely in store as Wall Street remains reactive to headlines.
Because of this, any year-end rally might be decided on two or three days worth of trading rather than a steady uptick.
"In no way, shape or form are we going to move higher in a straight line during December," Wren said. "It's going to be choppy. ... I think we'll be climbing a wall of worry."