Market 'acted pretty well' in '07

NEW YORK - Stocks managed to finish 2007 with respectable increases — not as large as 2006 but a better performance than the modest loss in 2005.

The annual gains came even after one of the worst fourthquarter drops in 20 years. Investors battled with billion-dollar losses at the world’s biggest banks and cooler spending by consumers, whose budgets have been crimped by record-high oil prices and falling home prices.

“Considering all that’s going on, the market really acted pretty well,” said Todd Leone, managing director of equity trading at Cowen & Co. It’s tough to say what the primary market driver of 2008 will be, but he said the fourth-quarter earnings season in January should shed some light on how U.S. companies are surviving the recent slowdown and credit crunch.

The Dow Jones industrial average gained 6.4 percent for the year, closing at 13,264.82. The blue-chip index remains below its Oct. 9 record high of 14,164.53, at which point it was up more than 13 percent year-to-date.

The Standard & Poor’s 500 index ended 2007 with a gain of 3.5 percent. It had reached a record close on Oct. 9.

The technology-dominated Nasdaq composite index finished highest, with a 9.8 percent gain. It was the best performance for the Nasdaq, still well below its tech boom highs, since 2003.

Investors with a diversified portfolio of market indexes that includes one-third foreign stocks saw a return of 8.9 percent, said Allan Roth, a certified financial planner in Colorado Springs. That’s the average return historically, he said, and rarely is there a year when the market returns near its average.

“The investor who stuck with (the portfolio) kind of had a boring year despite the market hype,” he said.

International leads

The story for 2007 was in the growth of foreign markets.

China’s stock market wound up a stellar — and turbulent — year with its benchmark Shanghai Composite index having soared nearly 97 percent, making it the world’s best-performing major stock index in 2007.

Looking ahead, concerns about tightening measures will likely restrain the market’s gains next year, analysts said.

“We expect the stock market will go up in 2008, but the magnitude of the growth will be less than that of 2006 and 2007,” said Gui Haoming, chief strategist of Shenyin & Wanguo Securities. “The economy will keep growing, but there is uncertainty” about the “government’s macroeconomic control.”

Outside of individual countries, emerging foreign markets led the international categories surging ahead 36 percent, led by Latin America.

The demand for energy and raw materials from those growing foreign markets helped propel commodities in 2007.

Industrial materials showed an average return of 50 percent. Meanwhile, the energy sector returned 40 percent for the year.

The power combination of those foreign markets and commodities helped investors like Michael Willis, manager of the Giant 5 mutual funds in Colorado Springs.

His two funds, The Giant 5 Total Investment System (FIVEX) and The Giant 5 Total Index System (INDEX) hold 50 percent of each of its investment categories in foreign markets and 20 percent overall in commodities. The difference between the two is the FIVEX is managed by investment professionals while the INDEX is invested passively in index funds. The FIVEX returned 14.5 percent for the year and the INDEX 8.6 percent.

“We got our money this year from raw materials and energy. They carried the portfolio,” Willis said. “The rules have changed. The global economy is here. There’s no foundation to having it all in the United States.”

Willis, who just returned from China, sees continued growth in raw materials and energy as foreign economies grow and create pressure on prices for food and gas.

Other investment analysts warn, however, that despite the big numbers shown by natural resources in 2007, it could be difficult to reproduce such steep gains in 2008.

Growth is king

Back in the U.S., investors fled small companies and sought safety in growing medium and large-size companies.

Growth stocks are seen as likely to show earnings or revenue gains that will outpace rivals. They generally don’t pay sizable dividends like the more established names referred to as value stocks. Some investors regard the momentum driving growth stocks as a safer bet should the overall economy begin to lose steam.

Jeff Tjornehoj, analyst with Lipper Inc., expects many investors will still find growth stocks attractive in 2008.

“Even though people are often told not to buy into the hot market or hot sector, the transition from value to growth has taken long enough that when they look back on the performance of their funds, people are going to notice that ‘Yes, indeed, value is suffering right now.’”

Investors’ distaste for real estate and the financial-services companies was clear. Many financial companies are struggling with bad mortgages on their books.

Real estate funds had a negative return of 14.9 percent for the year. And financial services funds had a negative return of 13.3 percent.

The Gazette’s Dan Serra contributed to this report.

SIZING UP THE FIELD

Winners

- Mid-cap growth +19.8%

- Large-cap growth +12.5%

Losers

- Small-cap value -8.2%

- Mid-cap value -5.5%

Markets

- Dow Jones industrial +6.4%

- NASDAQ +9.8%

- S&P 500 +3.5%

- Gold per ounce +31.1%

- Oil per barrel +57.2%

- 10-year Treasury yield -16.9%

Associated Press, WealthLogic LLC