The market volatility that characterized the second half of 2007 continued through December, as US equity markets alternated between gains and losses week by week. The S&P 500 index ended December with a loss of –0.69%, bringing its total return for the fourth quarter to –3.33%. For all of 2007, the S&P 500 returned +5.50%. Losses related to the subprime mortgage business once again dominated the news, as large institutions continued to report large writedowns. Merrill Lynch and UBS also joined Citigroup in receiving capital investments from foreign sovereign wealth funds.
Stocks fell in all capitalization ranges, although the S&P Midcap 400 index fell just –0.19% for the month (it returned –2.72% for the fourth quarter and +7.98% for the full year), and the Small cap 600 returned –0.79% for the month, –6.45% for the quarter, and –0.29% for the full year. Growth stocks generally outperformed value stocks for the month, quarter, and year. The S&P 500 ended 2007 at a level of 1468.38. At December 31, 1999, it stood at 1469.25 — the index moved less than one point in eight years. [Index returns and levels: Standard & Poors]
Overseas stocks shared the weakness of the US market. In local currencies, the MSCI Barra EAFE international equity index returned –1.18% for December, –2.96% for the fourth quarter, and +3.54% for the full year. The US dollar recovered a bit of strength against major currencies during December, ending the month at 111.396 yen (compared to 111.148 at 11/30, 114.745 at 9/30, and 118.765 a year ago at 12/31/06); $1.460 against the euro (from $1.464 on 11/30, $1.427 on 9/30, and $1.315 on 12/31/06); and $1.985 against the pound Sterling (from $2.057 on 11/30, $2.045 on 9/30, and $1.960 on 12/31/06). As a result of the currency movements, EAFE returned –2.25% in US dollars for December, bringing the index’s return in dollars to –1.75% for the fourth quarter, and +11.17% for the full year. [Index returns: MSCI Barra; currency yields: Yahoo! Finance]
Bond yields jumped around quite a bit during December, but they ended the month not far from where they began it. At year-end, the ten-year US Treasury yielded 4.04%, compared to 3.97% at November 30. The two-year Treasury ended the year at a yield of 3.05%, compared to 3.04% at November 30. Although yields made only small moves in December, they fell sharply for both the quarter and the year. At September 30, the ten-year yielded 4.59%, and the two-year 3.97%. A year ago, December 31, 2006, the ten-year yield stood at 4.71%, and the two-year 4.82%. Bond market performance reflected these changes, as the Lehman US Aggregate Bond Index returned +0.28% for December, +3.00% for the quarter, and +6.96% for the full year. [Interest rates: US Treasury; index returns: Lehman Brothers]