Home Stretch

December is here and 2007 is turning out to be a year many investors would prefer to forget. It is, of course, still possible that a Santa Claus rally will help the record books record an "average" year. Stranger things have happened. Yet the evidence suggests that whatever December brings, the longer-term picture is less than positive.

The stock market is driven by many factors but in the end they all boil down to one: corporate profits. When companies are making money - or when investors at least antipate that the will make money in the near future - you can expect to see stable or rising equity prices. When business is not growing and profitable, stocks are less valuable. This is why some recent reports are more than a little disturbing. Despite record earnings from foreign sales, per-share profits for the S&P 500 companies fell almost 25% in the 3Q. Some analysts expect the 4Q to be even worse.

Of course, profitability is not evenly dispersed. There are substantial differences between the various industry sectors and even between companies of the same sector. The bulk of this year's losses are in the financial services sector thanks to the meltdown in subprime mortgage securities. Unfortunately this happens to be a very big sector, and its problems threaten to spread into technology, retail and construction spending. Softness in the economy is also part of the reason that energy prices are in retreat. So far, oil company profits are still strong, but if the economy moves into recession even this powerful sector could lose its long-term momentum.

The safe havens continue to be the defensive sectors: utilities, consumer staples, and health care, along with selected foreign markets and Treasury bonds.