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Wall Street to ring in new year with uncertainty

As 2007 comes to a close, Wall Street is almost as jittery as it was over the summer, when worries about the housing slump and banks’ losing bets on mortgages first came to a head.
/ Source: The Associated Press

As 2007 comes to a close, Wall Street is almost as jittery as it was over the summer, when worries about the housing slump and banks’ losing bets on mortgages first came to a head.

Investors know more now about how much exposure financial institutions have to bad loans — quite a lot — but they remain uncertain about how the credit crisis of 2007 will hurt the economy in 2008. Market participants will be paying close attention to this week’s economic data, particularly the monthly report on employment, seen as the most important factor in preventing housing woes from crippling consumers.

Last week, the Dow Jones industrial average ended 0.63 percent lower, the Standard & Poor’s 500-stock index finished down 0.40 percent, and the Nasdaq composite index fell 0.65 percent.

The three major indexes will finish the year with gains, barring any extraordinary drops Monday, but problems with credit, housing and the financial sector are likely to keep Wall Street nervous at least early on in 2008.

It’s been a dismal fourth quarter for the stock market, and the “Santa Claus rally” Wall Street often launches at the end of every year failed to gain steam. The Dow has fallen 3.8 percent since the end of September, when many investors were driving the blue-chip index toward record heights and betting that the worst of the credit crunch was over.

Trading is expected to be very light ahead of the New Year’s holiday. On Wednesday, the first trading day of 2008, trading volumes should start rising again.

Wall Street will start the new year with minutes from the Federal Reserve’s Dec. 11 meeting, when policy makers lowered key interest rates by a quarter point. The move at the time disappointed investors who had been hoping for a more aggressive cut to keep the financial system running fluidly. Any comments implying the Fed is worrying more about inflation and hesitant to reduce rates further could jolt the market.

Also Wednesday, the Institute for Supply Management releases its manufacturing index and the Commerce Department reports on construction spending. Economists polled by Thomson/IFR anticipate that manufacturing expanded very modestly in December, and that construction spending dipped in November.

On Thursday, the data schedule is light. Major automakers release their December sales figures, and home goods retailer Bed Bath & Beyond Inc. and seed company Monsanto Co. report their quarterly financial results.

But Friday should be a big day on Wall Street, when the Labor Department releases its December report on payrolls and unemployment.

The solid job market in 2007 gave many investors hope that the U.S. economy can weather the worst housing market in decades without dipping into recession. Those investors will want to see signs that employment trend is holding up.

Economists forecast a smaller gain in payrolls in the last month of the year than in November, and they expect the unemployment rate to rise to 4.9 percent from the previous month’s reading of 4.7 percent. A drop in payrolls or a bigger jump in unemployment could heighten concerns about consumer spending plunging, and anxiety about significant problems arising in the types of consumer debt that have seen fairly minor upticks in delinquencies and defaults — such as credit cards, auto loans and prime mortgages.

Even a reasonably firm job market could allow consumer spending to keep slowing, said Henry Herrmann, chief executive officer at investment management firm Waddell & Reed.

“The Christmas selling season showed us the consumer is feeling the effects of the credit and debt build-up over the last few years,” Hermann said.

Another portion of the economy that Wall Street hopes will hold up in 2008 as it did in 2007 is the service sector, which has so far weathered the housing market’s drop much better than manufacturing. The ISM releases its December index of non-manufacturing activity on Friday, and economists predict slightly weaker expansion than in November.

Market measures indicate that pessimism is fairly high right now, said Scott Wren, equity strategist for A.G. Edwards & Sons. That shows investors are already pricing in big problems ahead of the fourth-quarter earnings season — which could mean an eventual rise in stocks if the corporate profits and the economy don’t weaken too much.

But market sentiment remains shifty.

“Early in the year, you’re going to want to stay defensive,” Wren said. “If the market’s going to retreat at all, it’s going to do it at the beginning of the year.”