A Bad Omen for Stocks

Fourth quarter stumble goes counter to typical year-end trend--Searching for Alpha, the monthly index newsletter for January 2008

For the first time since 1997, domestic equities lost ground in the last three months of the year. While this outcome is certainly not unexpected given the problems in subprime mortgages, corporate credit, and housing, both the holiday mindset and end of year buying typically propel stocks higher in the fourth quarter.

A lack of buying interest is troublesome, in my view, because it is evident that the same large players that bid stocks up in the last few weeks of the year aren't particularly interested in owning stocks going into January. Whether this means lower prices in the first quarter of 2008 remains to be seen, but it seems as though we may be in for a bit more short-term pain.

I'm a bit more sanguine longer-term. There are a lot of bargains to be had in the equity markets. Housing stocks, financial firms, and retailers are trading at historically low valuations, and will eventually rebound sometime next year. Global stocks are still attractive as well, and with the 11% drubbing it took in '07, I also expect Japan to recover.

And yes, Virginia, rate reductions will make a positive contribution to the markets. A combination of cheap money and a lack of attractive income-producing investments should put a shine on the fortunes of equity investors.

The Monthly Index Report for December 2007

Index

Dec-07

QTD

YTD

Description
S&P 500 Index* -0.86%

-3.82%

3.53%

Large-cap stocks
DJIA*

-0.80%

-4.54%

6.43%

Large-cap stocks
Nasdaq Comp.*

-0.33%

-1.83%

9.81%

Large-cap tech stocks
Russell 1000 Growth

-0.36%

-0.77%

11.81%

Large-cap growth stocks
Russell 1000 Value -0.97%

-5.80%

-0.17%

Large-cap value stocks
Russell 2000 Growth

0.63%

-2.11%

7.05%

Small-cap growth stocks
Russell 2000 Value

-0.85%

-7.27%

-9.78%

Small-cap value stocks
EAFE

-2.25%

-1.71%

11.63%

Europe, Australasia & Far East Index
Lehman Aggregate 0.28%

3.01%

6.97%

U.S. Government Bonds
Lehman High Yield

0.29%

-1.29%

1.87%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

0.43%

3.22% 8.33% Managed Futures
3-mo. Treasury Bill*** 0.28% 1.12%

5.20%

All returns are estimates as of December 31, 2007. *Return numbers do not include dividends.

** Returns are estimates as of December 27, 2007.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.

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