The U.S. housing meltdown and credit crunch, which brought a swift end to an investment bonanza earlier this year, is likely to give Wall Street a stiff hangover during 2008, market strategists say.
A flurry of private-equity-fueled buyouts and corporate takeovers helped propel the Dow Jones Industrial Average to an all-time record high of 14,164.53 points in early October, but the Dow has swooned since then as the housing downturn has worsened.
Investment strategists said the housing slump, now almost two years old, and a related credit squeeze that has triggered multibillion dollar losses at some of America's biggest financial firms, may temper stock market advances in the coming year.
"Growth has clearly slowed in the fourth quarter in the U.S.," said Steve Bleiberg, president, Legg Mason Global Asset Allocation.
Credit flows have tightened because big banks have lost billions of dollars in mortgage-related investments, which has forced them to curtail lending and triggered efforts by central banks to boost liquidity.
Overseas stock markets have also been singed by the pullback in U.S. shares as foreign investors had also gorged themselves on U.S. mortgage-backed securities during the housing market's boom years.
Some analysts believe the housing and credit woes could destabilize the wider U.S. economy, or even trigger a recession, which would further depress Wall Street sentiment.
"A recession in 2008 is a possibility, but the stock market always faces unknowns and unknowables. Consumers are feeling worse about economic conditions and future prospects." said Al Goldman, a chief market strategist at AG Edwards.
U.S. investors are on tenterhooks awaiting to see if big retailers' earnings will be clipped over the crucial Christmas holiday shopping period by consumers reining in their spending.
Strategists do not expect a mortgage rescue plan, essentially for Americans with patchy credit holding subprime home loans and backed by U.S. President George W. Bush, to significantly bolster Wall Street.
U.S. economic momentum held up well for much of 2007, but the Federal Reserve trimmed its 2008 growth forecasts in late November to a range of 1.8-2.5 percent. The central bank had previously predicted gross domestic product growth of up to 2.75 percent.
As such many analysts are cautiously predicting single-digit gains for the Dow and the broader Standard and Poor's 500 index in 2008.
The Dow is on course to post around an eight percent gain for 2007 while the S&P looks set to realize a rise of about five percent. The technology-rich Nasdaq index may yield a heftier 12 percent gain baring sharp market shifts.
While U.S. investors might be exhibiting wariness, foreigners do not seem to have lost their appetite for U.S. assets.
A Singapore government-run investment fund, Temasek, is buying a 4.4-billion-dollar stake in Merrill Lynch, and the state-run Abu Dhabi Investment Authority has purchased a US$7.5 billion stake in Citigroup.
Strategists said a weak dollar could tempt other "sovereign wealth funds" to snap up American investments which would inject capital into U.S. markets.