Stocks fell on Monday, ending a tumultuous year that battered financial firms but left other pockets of the market and the world with stunning gains.
Even a report that showed sales of existing homes had been nudged up in November failed to lift the market as traders closed their books on a year marred by the running crisis in the mortgage market. A small rally in the afternoon helped cut early losses but was not enough to push the market into positive territory.
The Standard amp; Poors 500-stock index ended the year up 3.5 percent, slightly less than the inflation rate. For the day, the index fell 10.13 points, or 0.7 percent, to 1,468.36 in relatively light trading. The Dow Jones industrial average, which closed up 6.4 percent for the year, ended the day down 101.05 points, or 0.8 percent, at 13,264.82.
“It has been a disappointing year,” concluded Tobias Levkovich, chief United States equity strategist at Citigroup. “The debt bubble burst and its ramifications were far wider than most people anticipated.”
It was also a year of stark contrasts. While the broad market struggled under the weight of the credit crisis, which hurt financial firms, home builders and retailers, sectors like technology, energy and materials posted remarkable gains. The Nasdaq composite index, which includes many technology stocks, ended the year up 9.8 percent, its best showing since 2003. Foreign markets, particularly in developing countries, did even better.
Ultra-safe Treasuries and risky emerging markets both rewarded investors. For the first time since 2002, when the last bear market ended, Treasuries outperformed the S.amp; P. 500 as investors sought a haven in government debt. Including dividends and interest payments, the S.amp; P. returned 6.2 percent while a Merrill Lynch index that tracks government-backed debt returned 8.5 percent.
“There was a flight to quality,” said Douglas Peta, chief market strategist at J.amp; W. Seligman, an investment firm based in New York.
Investments that had even a slight taint of risky subprime mortgages were battered. A Merrill Lynch index that tracks floating-rate securities backed by home loans fell 10.9 percent through November, after including interest payments. MBIA, a company that guarantees those debts, fell 74.5 percent for the year.
Financial stocks tumbled 20.8 percent for the year and shares in the consumer discretionary sector, which includes home builders and retailers, sank 14.3 percent. Other areas of the market rose, but the decline in these two big sectors hurt benchmark indexes. Together the sectors accounted for about one-third of the stock markets valuation at the start of 2007; they account for about one-fourth now.
As investors bailed out of investments perceived as risky at home, they sought out growth elsewhere. Billions of dollars flowed from the developed world into fast-developing economies in Asia, Latin America, Africa and Eastern Europe.
Shares in Shanghai and Shenzhen, China, were up 179 percent; the Nifty 50 index in India was up 74 percent and the Bovespa index in Brazil was close behind at 73 percent. By contrast, the Nikkei 225 index in Japan ended the year down 5.3 percent.
“Typically, you would expect in a flight to safety that investors would flee emerging markets,” Peta said. “That they havent shows that there is a strong desire to invest in growth.”
The growth in developing economies also has helped propel the prices of commodities like oil (up 58 percent), wheat (68 percent) and gold (31 percent). And the United States dollar has fallen against many currencies, including the Chinese yuan, Indian rupee, the euro, the British pound and the Canadian dollar.
Many investors believe that the slower growth of the American economy will not hobble its trading partners in Asia, Europe and Latin America. Their view also reflects a belief that the dollar will continue to sink, making stocks elsewhere more attractive. From the start of 2007 through Dec. 26, investors had put $141 billion into foreign equity funds, compared with just $49 billion in domestic stock funds, according to AMG Data Services, a research firm.
But some specialists are unsure that developing economies, many of which rely heavily on exports to developed countries, will continue to thrive. Bernard Connolly, the global strategist for Banque A.I.G. in London, said that European countries were also starting to contend with housing and credit problems.
“World demand, which has been extremely buoyant for a couple of years, is visibly melting away,” Connolly said. “Sitting here in London, its very easy to see.”