Wall Street still up in 2007 despite volatile 12 months

NEW YORK -- Wall Street ended a painful year with another steep loss Monday as investors glumly anticipated that 2008 would bring more of the uncertainty and turbulence of 2007.

The Dow Jones industrials fell 101 points Monday, the latest in a string of triple-digit moves that became commonplace in 2007 amid a continuum of bad news about housing, faltering mortgages and shrinking credit.

Thanks to a big first-half advance, Dow stocks managed to finish 2007 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, as well as 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.

For 2008, the stock market faces a slew of threats: more adjustable-rate mortgage resets, a still-tight credit market and the possibility of accelerating inflation.

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.

The Dow closed Monday off 0.76 percent, falling 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 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 2007 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 Friday, and is down nearly 17 percent for the year.

Annual recap

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 2006. Then, in late February, 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 the ongoing slump in housing and a rise in mortgage foreclosures was taking a toll.

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 $10 trillion U.S. mortgage market.

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 mortgage payments. When one slice of the instrument defaulted, it pulled the whole thing down with it.

Soon Wall Street discovered financial institutions in the U.S. and overseas were holding billions of dollars in assets that were losing value by the day. Merrill Lynch, Citigroup and Bear Stearns announced billions of dollars in writedowns. Merrill and Citi lost their CEOs.

In the midst of this turmoil, the credit markets all but seized up. The Dow suffered triple-digit drops, recoveries and then drops again as Wall Street stumbled through months of volatility.

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 credit mess.

In 2007, the technology, energy, industrials and health-care 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 percent, and the biggest loser was Citigroup, with a loss of 47 percent.