The US 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 next year, 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 the biggest financial firms in the US, may temper stock market advances in the coming year.
"Growth has clearly slowed in the fourth quarter in the US," said Steve Bleiberg, president of Legg Mason Global Asset Allocation.
Bleiberg said the over-riding concern for US investors in the coming 12 months would likely be the health of the credit markets and whether companies would be able to tap fresh capital.
Credit flows have tightened because banks have lost billions 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 US shares as foreign investors had also gorged themselves on US mortgage-backed securities during the housing market's boom years.
Some analysts believe the housing and credit woes could destabilize the wider US economy, or even trigger a recession, which would further depress Wall Street sentiment.
US 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 to significantly bolster Wall Street.
Some analysts believe the plan may just delay further property foreclosures.
US economic momentum held up well for much of this year, but the Federal Reserve trimmed its growth forecasts for next year in late November to a range of 1.8 percent to 2.5 percent. The central bank had previously predicted GDP 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 next year.
While US investors might be exhibiting wariness, foreigners do not seem to have lost their appetite for US assets.
The Singapore government-run investment fund, Temasek, is buying a US$4.4 billion stake in Merrill Lynch, and the state-run Abu Dhabi Investment Authority has purchased a US$7.5 billion stake in Citigroup.
The Dow is on course to post around an 8 percent gain for this year while the S&P looks set to realize a rise of about 5 percent. The technology-rich NASDAQ index may yield a heftier 12 percent gain baring sharp market shifts.
Back-to-back interest rate cuts in September, October and this month have helped shore up confidence and some analysts say the Federal Reserve may have to slash borrowing costs further next year to reassure nervous investors.
For now, mega deals like the US$32 billion takeover of Texas energy group TXU mounted by a private equity consortium, including Kohlberg Kravis Roberts, early this year are unlikely to be repeated anytime soon.
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