A Not-So-Happy New Year for Investors

By Peter Whoriskey
Washington Post Staff Writer
Saturday, January 24, 2009

So much for Santa Claus and other high hopes.

The post-Christmas rally that seemed to propel the stock market out of the depths and into the new year has dissipated into plain old wintry gloom.

Each of the major indexes is down sharply since the post-holiday surge. Since Jan. 6, the Dow Jones industrial average is down 10 percent, the Standard & Poor's 500-stock index is down 11 percent and the Nasdaq composite index is down 11 percent.

Though the markets were relatively flat yesterday -- the Dow dropped 0.6 percent, or 45.24 points, to 8077.56, while the S&P 500 rose 0.5 percent, or 4.45 points, to 831.95 -- thus far it has been a disappointing January.

"We started off with an awful lot of high expectations," said Sam Stovall, chief investment strategist for S&P Equity Research. "This just shows that there is an awful lot of uncertainty out there."

Analysts said the recent decline stems in large part from reports of staggering new losses at financial titans Citigroup and Bank of America, big enough that Bank of America was rendered another dose of government assistance. This has provoked questions about the solvency of institutions throughout the financial world.

Add to that the downturn in earnings for some blue-chip companies and layoffs at stalwarts such as Microsoft (5,000 jobs), Alcoa (15,000), Intel (5,000 to 6,000) and Pfizer (3,200), and there's reason enough for some investors to check out of the market.

Like other analysts, E. William Stone, chief investment strategist for PNC Wealth Management, said the trouble for banks has generated trouble for stocks across other parts of the economy.

"The tentacles of the financial sector reach out to all the other industries," he said. "We're still struggling with the feeling that we are still in a free-fall."

It's bleak enough now, he added, that market watchers are looking not for signs of a rebound but for signs of a "decline in the rate of decline."

Since the new year, the market has been beset by a string of bad news from some of the world's biggest financial institutions.

Citigroup said it lost $19 billion last year.

Last week, Bank of America got more than $20 billion in additional government assistance in part to help it swallow another troubled financial institution, Merrill Lynch.

And the Royal Bank of Scotland said it may have lost $41 billion last year, leading the British government to announce a second bailout for the company that increases the government's stake in one of Britain's largest banks.

At least some of the high hopes leading into January grew out of anticipation that the incoming Obama administration would fix things -- and fast.

But at least some analysts said investors have been disappointed by the $825 billion economic stimulus package that has been proposed and by the ongoing uncertainty over what the government will do to prop up the banks.

Ed Yardeni, president and chief investment strategist at Yardeni Research, said he was skeptical of the stimulus package because much of the spending in it may come well after the crisis is over, as a report from the Congressional Budget Office has suggested.

He criticized its varied components -- some for health-care technology, some for energy, some for tax breaks, and so on -- as amounting to a "kitchen sink" approach.

"I don't think there's a great deal of confidence that the fiscal stimulus program that's being put together will do much good," Yardeni said. "While I hate to say the honeymoon is over this early, it certainly seems that way given the way that the stock market and bond market are behaving."

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