Stock Market Shows Resilience In a Year of Economic Turmoil

Analysts Predict Continued Growth and Volatility in 2008

NEW YORK, Dec. 31 -- After a year of stomach-churning swings, U.S. stocks managed to finish 2007 with a modest gain despite a worsening credit crunch and concerns about an economy possibly headed for recession.

When the final bell rang Monday on Wall Street, the Dow Jones industrial average of 30 blue-chip stocks stood at 13,264.82, up 6.4 percent for the year. The broader Standard & Poor's 500-stock index closed at 1468.36, up 3.5 percent for the year. The tech-heavy Nasdaq fared best, finishing at 2652.28, up 9.8 percent. The S&P has now finished with a gain for the fifth year in a row, although this year's advance is much smaller than last year's 14 percent rise.

"It was a mixed year at best," said Sal Morreale, a trader at Cantor Fitzgerald.

Stocks started 2007 with a brief rally but plunged in late February, with the Dow shedding 416 points in one day as concerns about subprime mortgages swept through the market.

Within weeks, investor optimism about a strong global economy and solid domestic employment began pushing shares higher. On May 30, the S&P 500 hit an all-time high, surpassing its record reached at the end of the tech bubble seven years earlier.

Shares continued to climb for a few months, although quarterly corporate earnings growth slowed to single digits for the first time in four years. At the same time, signs were emerging that an increasing number of Americans were struggling to make payments on their mortgages. Wall Street investment banks had pooled billions of dollars of these mortgages, packaging them into securities sold to investors around the world.

The stock rally, analysts said at the time, was in part prompted by a lack of investing opportunities elsewhere; a low-interest-rate environment had diminished returns for money markets, bonds and other non-stock investments, and a global financial system awash in cash meant investors in high-risk assets such as corporate junk bonds and subprime-mortgage securities were getting only modestly better returns than those invested in safer assets.

But all that changed almost overnight in mid-summer with the subprime problem morphing into a full-blown credit freeze.

With fear taking hold, investors sold off risky assets of all types, fleeing stocks and funds that sometimes had little to do with the troubled U.S. housing or mortgage markets. Money managers faced massive withdrawals. Central banks in Europe, Asia and the United States pumped tens of billions of dollars into the financial system, as the cost of borrowing rose for many consumers and companies.

Volatility returned in full force. Shares of automakers and companies that produce household goods, textiles, clothing and leisure equipment were beaten down as investors doubted the ability of consumers, who fuel two-thirds of the economy, to keep spending.

Financial shares took a brutal hit as their earnings outlook clouded. The lucrative business of selling mortgage-related securities was over, as was the leveraged-buyout boom that had driven Wall Street banks to sell hundreds of billions of dollars in debt to yield-hungry investors.

Leveraged buyouts, in which acquiring firms typically pay hefty premiums to take public companies private, slowed sharply in the second half of the year. A total of $25 billion in deals were announced in the fourth quarter in the United States as of last Thursday, down 85 percent from a year earlier, according to Dealogic, a data-research company.