Stock Market Shows Resilience In a Year of Economic Turmoil

Although the stock market gain was meager at best, analysts and traders noted that initial public offering activity was high, share buybacks were at record highs and investors in certain sectors were handsomely rewarded.

"You had oil prices go through the roof, and you had the subprime problem hit," said Andy Brooks, head of stock trading at the Baltimore brokerage T. Rowe Price. "In light of the challenges . . . I think, frankly, the market's done well."

Helped by record oil prices, companies in the energy sector fared best in 2007, gaining 32.4 percent. The materials sector, buoyed by rising commodity prices, also did well, advancing 20 percent. By comparison, the financial sector lost 20.8 percent, while consumer discretionary shares shed 14.3 percent.

Without financials, which make up 20 percent of the S&P 500, the index would have gained more than 10 percent for the year, said Howard Silverblatt, a senior index analyst at Standard & Poor's. Companies in the index, Silverblatt said, bought back an estimated $586 billion in shares in 2007, up from $431 billion the year before. They were able to do so in part because of their strong balance sheets. Excluding the financial and utilities sectors, companies in the S&P 500 have $623 billion of cash on their books, Silverblatt said.

In the coming months, investors will be watching the housing market, consumer sentiment, employment numbers and earnings from major Wall Street firms to determine where the stock market goes from here. Although consumer spending has remained surprisingly robust, any weak jobs data is likely to send a nervous market spiraling downward. Billions of dollars in additional losses are expected at investment banks in early 2008, and that could get a lot worse if the housing and mortgage markets do not stabilize, analysts say.

Kevin Shacknofsky, a portfolio manager at Alpine, said stocks were not overpriced, trading at about 15 times the expected earnings for 2008. In addition, Shacknofsky said, the Fed should continue to cut its short-term interest rate, which generally helps stocks. He predicts a double-digit rise in the market in 2008.

Despite reduced liquidity, or ability to trade assets easily, there is no shortage of capital, Shacknofsky noted, pointing to foreign governments in cash-rich Asian countries and the Middle East that have invested billions of dollars in faltering U.S. financial companies.

"There are a trillion dollars of sovereign wealth funds searching for a home," he said. "The capital is available. There just needs to be a confidence to invest it."

In the meantime, analysts said, investors should expect continued volatility in the stock market as the financial system works through uncertainty about further damage at the nation's big banks and looks for the bottom in the housing market.