IE 11 is not supported. For an optimal experience visit our site on another browser.

Stock market seen going from wild to mild

After a wild year in which the stock market was whipsawed by housing-related losses, analysts expect modest growth in 2008, assuming the economy skirts a recession. readers proved prescient last year when they predicted the stock market would end the year with moderate gains, but it is doubtful many foresaw the roller-coaster year that gave investors a case of whiplash.

On Monday — the last trading day of 2007 — the Dow Jones industrial average closed at 13,5264, a gain of 6.43 percent for the year. Considering the turmoil in the financial markets this year and concerns about a possible recession in 2008, that is a solid return for investors, although the Dow stands well below its record closing high of 14,164.53 posted Oct. 9.

It was a year of wild swings for the stock market, which finally broke through some of the key benchmarks set during the dot-com bubble of late 1990s only to fall back in the final months of the year as concern intensified about the housing downturn. Still, many analysts expect stocks to rise moderately in 2008, based largely on the expectation that the U.S. economy will skirt a recession.

“What we basically are hoping for is a slow-growth environment and not a recession,” said Sam Stovall, chief investment strategist for Standard & Poor's Equity Research Services.

Still, a recession is clearly a risk, he said, noting that every recession of the past half-century has been accompanied by a downturn in housing construction. Housing starts were down about 25 percent this year, but Stovall noted that in the mid-1960s and again in the mid-1990s residential contstruction declined without dragging the economy into recession.

If the economy does tip into recession, Stovall said, he is hoping for a shallow, corporate-led recession similar to what we experienced in 2001, rather than a more damaging consumer-led recession as in the 1970s and '80s.

Given the risks, it is all the more remarkable that the market has held onto its gains for the year, and many analysts credit Federal Reserve Chairman Ben Bernanke and his colleagues with riding to the rescue. In August, as credit markets went haywire over losses stemming from bad mortgage loans, the Fed swooped in and began pumping money into the global financial system.

So far the central bank has lowered the benchmark overnight lending rate three times to 4.25 percent and taken concerted action with other central banks as part of its efforts to restore confidence in the banking system and keep the wheels of capitalism greased.

“The recent (stock market) rally we’ve seen from time to time has been the result of the Fed easing,” said Sung Won Sohn, an economist and CEO of Hanmi Financial Corp. in Los Angeles. “(Investors) assume the Fed will not allow a recession to unfold.”

But those assumptions are untested. Sohn himself sees a 50-50 chance of recession next year, which is sky-high considering how rare it is for mainstream economists to actually predict an economic contraction.

If the U.S. economy avoids recession in 2008, it might well because of strength overseas, especially in China, South Korea and other emerging economic powers, he says.

“In the past we have been like a locomotive pulling the global economy forward,” he said. “In the future I think the developing nations might pull the United States and Europe forward.”

One positive sign for the stock market is the well-documented political–economic cycle that tends to boost conditions going into a presidential election year.

Historically the third year of a president’s term is the best for the stock market as investors anticipate and react to economic stimulus typically put in place by incumbents in Congress and the White House. But the stock market also rises in 80 percent of presidential election years, said Stovall.

And for whatever reason, years ending in “8” are among the best for the stock market, with the S&P 500 rising in 90 percent of those years dating back to 1900, said Stovall.