Stocks finished with a whimper on the last trading day of the year, a fitting end to a dismal year in which the Dow put in its worst performance in a quarter century. The Dow ended Tuesday's session up 9 points, or 0.11%, to 8341 while the S&P 500 was up 0.43 points, or 0.05%, to 880. The Nasdaq was down 4 points, or 0.30%, to 1335. All three averages ended down for a third-straight year, something that hasn't happened since 1939-41. The Dow slid 16.5% for the year while the Nasdaq fell 31.5%; the S&P lost 23.4%. "It's not one people want to remember," said Ben Hovermale, head trader at Wells Capital Management. Indeed, the year 2002 will be looked back upon as a period of massive corporate accounting scandals, bankruptcies and federal indictments, all of which sent stocks into a tailspin. Still, it also will be known as a time of sweeping regulatory reform. After the collapses of WorldCom, Adelphia, Global Crossing and Arthur Andersen, and amid revelations of insider trading at ImClone Systems ( IMCL), the government signed into law the Sarbanes-Oxley Act, which compels executives to certify their financial results and bars companies from making personal loans to executives and directors. The new law also mandates that corporate insiders report their trades within two days instead of 10. Wall Street has been transformed in other ways, too. New York state Attorney General Eliot Spitzer's campaign against the major investment banks forced them to cough up significant fines and change the way they do business. From now on, research analysts will have to disclose any conflicts of interest they may have with their investment banking teams, and brokers will be required to provide independent research from a third party. Meanwhile, many of the key players who once defined bull market excesses were replaced this year. Salomon Smith Barney telecom analyst Jack Grubman resigned in ignominy after emails revealed that his research was biased.
In addition, Lehman Brothers analyst Jeffrey Applegate and Credit Suisse First Boston's Tom Galvin, both of whom recommended that clients keep 80% of their holdings in stocks in March 2000, also were let go, as was Merrill Lynch's bullish economist Bruce Steinberg. Goldman Sachs' Abby Joseph Cohen and Morgan Stanley's Mary Meeker managed to hold on to their jobs, however. Analysts weren't the only ones being punished for their behavior. In fact, a slew of corporate executives either quit or were fired amid allegations of wrongdoing or mismanagement. Among them were Tyco's ( TYC) CEO Dennis Kozlowski, Qwest's ( Q) CEO Joseph Nacchio and Dynegy's ( DYN) CEO Charles Watson. The resignations extended to the highest levels of government, with Securities and Exchange Commission Chairman Harvey Pitt, Treasury Secretary Paul O'Neill and White House economic adviser Larry Lindsey all leaving their posts in December as the economy continued to struggle and unemployment reached an eight-year high. While 2002 was a year of cleansing for Wall Street, the market continues to face huge challenges going into the new year. Terrorist activities such as the deadly explosion in Bali, shootings in Yemen, attacks on U.S. marines in Kuwait, and other events around the globe have unnerved investors all year, and another attack on U.S. soil remains a key concern, as does the possibility of a war with Iraq. "The key question is whether the new year has some near-term resiliency, or whether surmounting the wall of worry will take us into the back end of 2003," wrote Larry Wachtel, senior vice president of trading at Prudential Securities. "Resolving Iraq (war or peace?) is the single most important item in relieving the uncertainty." While another losing year for stocks is considered unlikely by most analysts, two of the major Wall Street firms, Merrill Lynch and J.P. Morgan, are calling for declines in 2003, noting that stocks are too expensive and that the market remains overly speculative. J.P. Morgan analyst Carlos Asilis is calling for the S&P to fall to 800 next year while Merrill's Richard Bernstein expects it to end the year at around 860. The S&P closed Tuesday's session at 880. "We recommend that investor portfolios maintain a defensive orientation," Asilis said. "Our outlook continues to be driven by below-consensus earnings expectations for 2003 and lingering valuation concerns for the S&P 500."