Market’s volatility isn’t over yet

We’re about to say goodbye to a manic year for the market.

Hmmm, we never did quite hit that 15,000 on the Dow, did we? But boy, we looked like we were headed that way earlier in the year. Then the credit crunch — and falling home prices — landed on Wall Street.

The Dow bounced up and back, down and around in 2007. We hit the record-breaking 13,000 and 14,000 marks. A few times. And yes, we did fall close to 12,000 at some points, too.

Talk about Wall Street whiplash.

On Dec. 31, the Dow closed at 13,264. It’s a 6 percent gain from year-end 2006, when the Dow closed at 12,463 points. But we’re not talking about anything close to the amazing 16 percent jump on the Dow that we saw in 2006.

As for 2008? Don’t kid yourself into thinking that the coast will be clear with a change in the calendar. Risks remain: a better-than-average shot at a recession in 2008.

Uncertain fallout from housing. A roadblock for mega-mergers, which drive up stock prices, now that the credit crunch is putting a squeeze on big companies and little homeowners. Potential cutbacks in consumer spending — and jobs.

And yes, we’ll get political yammering out of the presidential election in 2008. Some of that noise could be bad news for stocks, too.

“It’ll still be about avoiding the land mines,” said David Sowerby, a Bloomfield Hills, Mich.,-based portfolio manager for Loomis, Sayles & Co.

What’s more interesting is what’s buried in the numbers for 2007.

The Standard & Poor’s 500 basket of stocks was up for 2007, but what’s unusual is that many individual stocks in the S&P 500 saw far more dramatic losses than we saw in the past two years.

Sowerby noted that one out of four stocks — or 125 stocks — in the S&P 500 posted a loss of 20 percent or more for the year through Dec. 20.

By contrast, 16 stocks in that mix had a loss of 20 percent or more last year, according to Bloomberg data.

The average loss of the 20 worst performers in the S&P 500 was 69.2 percent for the year through Dec. 20. By contrast, the average loss for the 20 worst performers in 2006 was 26.9 percent.

We saw such losses as the S&P 500 index’s total return — including dividends — was up 4.8 percent for the year through Dec. 20. Total returns, including dividends, for the S&P 500 index hit 15.8 percent for all of 2006.

Sowerby noted that avoiding high-risk stocks was essential for an investor’s survival in the past year. He said that will likely be the trend for at least the first half of 2008.

Areas to avoid: financials, home-related builders or retailers, and some consumer discretionary stocks.

Jeff Gembis, first vice president of investments for Merrill Lynch in Bloomfield Hills, said investors will need a well-diversified portfolio — including exposure to the global markets — to profit in 2008.

Johnson, Sowerby and others maintain that the stock market overall will have a year of positive returns.

Chicago-based Mesirow Financial, for example, is forecasting that the S&P 500 would see a total return — including dividends — ranging from 5 percent to 7 percent in 2008.

Larry Moss, senior vice president for Raymond James in Birmingham, said investors should expect that 2008 would be a volatile year for stocks — and plan accordingly by paying attention to the stocks that they own.

“Investors should still be in this market. They just have to be a little careful in how they invest,” Moss said.

X Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com