Markets & Finance

Stocks: A Dismal Year Ends


An unexpected fall in weekly jobless claims boosted stocks on the last day of 2008, capping the worst annual performance in a lifetime

Stocks moved higher on the last day of a disastrous 2008 for the markets. The Dow Jones Industrial average dropped 33.8% in 2008, the broader S&P 500 index fell 38.5% and the Nasdaq composite had its worst year ever, plunging 40.5%.

After the dismal market performance in 2008, the prospects for 2009 are not bright. Brian Gendreau, investment strategist at ING Investment Management, expects defensive sectors of the market -- such as consumer staples stocks -- will continue to outperform. "We're still going to be getting bad economic news for a while," he says.

Action Economics latest survey does not suggest any improvement in economic conditions in the new year as the recession is expected to deepen.

However, some economists believe economic conditions should improve by the middle of 2009. Keith Hembre, First American Funds' chief economist, figures growth will resume by the second half of the year, "but at a fairly meager pace, driven largely by anticipated government stimulus."

Consumers, indebted and hit hard by market turmoil in 2008, may permanently cut back spending in future years, moving "toward greater frugality," Hembre says.

For the S&P 500 index, 2008 will go down as the third worst year ever. The S&P 500's 38.5% loss in 2008 is exceeded by the 47.1% plunge in 1931, and just barely better than a 38.6% drop in 1937.

The Dow's 33.8% loss in 2008 was the third worst since 1901, exceeded only by a 52.7% drop in 1931 and the 37.7% decline in 1907.

But the worst of the major indexes was the Nasdaq Composite, which turned in its worse performance ever. The Nasdaq plunged 40.5%, beating 2000's 39.3% drop and making it the worst single year for tech stocks since the index was started in 1971.

2008 Stock Index Performance

Index

Dec. 31 Close

Percent Change YTD

DJIA

8776.39

-33.84%

NASDAQ

1577.03

-40.54%

S&P 500

903.25

-38.49%

S&P MidCap

538.2

-37.29%

S&P SmallCap

268.7

-32.00%

Performance for the S&P 500 index in the following year after a bad one has been mixed, says Philip Roth at Miller Tabak. In 1930, when the S&P 500 index fell 28%, it was followed by a 47% decline in 1931. The 39% drop in 1937 was followed by a 25% advance in 1938. The 18% decline in 1941 led to up 12% in 1942. All three of those years were associated with the secular bear market that followed the 1929 bubble collapse, he says.

The current secular trend is not up either, Roth says. "We believe the 1982-2000 secular uptrend was broken with the 2000-2002 collapse in the technology, telecommunications, and media leadership, and the 2007 collapse in financials has broadened the secular bear market," he wrote in a note on Dec. 31.

On Wednesday, the 30-stock Dow Jones industrial average gained 108 points, or 1.25%, to 8,776.39. The broader S&P 500 index rose 12.61 points, or 1.42%, to 903.25. The tech-heavy Nasdaq composite index added 26.33 points, or 1.7%, to 1,577.03.

Trading was active. On the New York Stock Exchange, 26 stocks moved higher for every four falling in price. On the Nasdaq, the ratio was 21 to 6 positive.

In economic news, weekly jobless claims surprisingly fell 94,000 to 492,000. But continuing claims for the week ending Dec. 20 jumped 140,000 to 4,506,000, and the insured unemployment rate ticked up to 3.4%, exceeding the peaks in the 1990 recession and the highest reading since 1983. "The market will take solace in the massive drop in initial claims in this final U.S. economic report of the year," says economic research outfit Action Economics in a note. "Yet, continuing claims are continuing to soar, and the steep up-trend in both series is likely intact, despite the small "Christmas present" with today's seasonal distortion."

Says Julia Coronado at Barclay's Capital in a note: "Overall, the report points to ongoing and severe deterioration in labor market conditions, and suggests we are likely to see further sizeable job losses and a rise in the unemployment rate in the December employment report due out next week."

The Mortgage Bankers Association's mortgage application index, which has risen lately, was flat. The ABC News/Wash Post consumer comfort index was off a bit.

Meanwhile, Freddie Mac (FRE) said the 30-year fixed-rate mortgage in the past week fell to a 37-year low of 5.10% from 5.14% last week amd 6.07% in the same week a year ago.

Frank Nothaft, Freddie Mac vice president and chief economist said: "Since the end of October of this year, these rates have declined by about 1-1/3 percentage points, or payment savings of approximately $173 a month for a $200,000 loan. As a result, the number of refinance applications for conventional mortgages jumped over 500% between the weeks ending on October 31 and December 26. Lower rates and falling house prices are also making homeownership more affordable to potential homebuyers."

Among stocks in the news on the last day of the year, Dell (DELL) says it will organize globally around three major customer segments: large enterprise, public sector, and small- and medium-sized businesses. The PC maker announces that Mike Cannon, president of Global Operations, will retire effective Jan. 31, will be succeeded by Jeff Clarke who, in addition to being head of Dell's Business Client Product Group, will become vice chairman, Global Operations. In addition, Chief Marketing Officer Mark Jarvis will leave this quarter, will be succeeded by Erin Nelson.

Puget Energy (PSD) announced that Washington state regulators approved the sale of the company and its wholly-owned electric and natural gas utility subsidiary, Puget Sound Energy, to New York-based Puget Holdings LLC for $7.4 billion or $30 per share. It notes the sale subject to 78 commitments and conditions to protect customers and the public interest.

Viacom (VIA.B) is launching a media blitz taking aim at Time Warner (TWX) over a programming-fee dispute, reports the WSJ. According to the article, "Barring a last-minute settlement, Viacom's cable channels -- including Nickelodeon, MTV and Comedy Central -- will disappear from Time Warner Cable at midnight Wednesday."

National Penn Bancshares (NPBC) expects to record non-cash charges for the fourth quarter 2008 related to an other-than-temporary impairment of some pooled trust preferred investment securities of $60-$65 million. Also expects to record a provision for loan losses of $17-$20 million for the fourth quarter, up from $6.88 million in the third quarter.

Bonds were lower as some traders are worried about next year's heavy supply to support economic stimulus plans designed to help rescue the nation from the worst recession in decades. The 10-year note was down 1-18/32 to 113-18/32 for a yield of 2.217%, the 2-year note was off 03/32 to 100-07/32 for yield of 0.777%, and the 30-year bond fell 3-04/32 to 137-05/32 for yield of 2.670%.

February NYMEX crude oil jumped $5.57 to settle at $44.60 a barrel, following the EIA inventory data which showed a 0.5 million barrel rise in crude stocks. The Street had been expecting a 1.5 million barrel decrease. Meanwhile, gasoline supplies, seen up 1.5 million barrels actually rose 800,000 barrels, while distillate stocks were up 700,000 barrels, versus expectations for a 1.0 million rise.

The dollar index was higher at 81.22. Gold futures rose to 881.

The markets will be closed for New Year's Day.

Next week's economic calendar includes the December nonfarm payrolls report, which is expected to post a 480,000 decline in jobs and a run up in the unemployment rate to 7.0%, according to Action Economics.


Steve Ballmer, Power Forward
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