Wall St's early bruising spells trouble ahead in 2008

NEW YORK (Reuters) - If Wall Street's dismal start to 2008 is any indication, there is growing unease among stock investors that this year could be one of scanty returns, or worse.

The first five days of any year are considered an "early warning system" according to the Stock Trader's Almanac, whose highly accurate "January Barometer" states that as the S&P goes in January, so goes the year.

It's been very bad so far. The Standard & Poor's 500 index's .SPX 5.32 percent drop in the first five days of 2008 through Tuesday marks the worst start to a year ever for the benchmark U.S. equity index.

As fears of a U.S. recession mount on the heels of poor factory and employment data, and the market's leadership from technology bellwethers such as Intel Corp (INTC.O) and Apple Inc (AAPL.O) all but broken, analysts fear the ugly start to January spells trouble for the stock market in the near term.

"Looking at the big picture, I think there's more downside to go. I think we're in for a bigger decline," said John Kosar, market technician at Asbury Research in Chicago. "The market is pretty afraid of economic weakness here."

There have been years in which U.S. stocks have had rocky starts but still finished with a positive return, including 2005 and 2007, but at the very least the market could be in for a bumpy first quarter, analysts said.

A TUESDAY TO REMEMBER

U.S. stocks tumbled on Tuesday after a warning by phone company AT&T (T.N) of soft consumer spending sparked yet another round of recession fears and left AT&T's stock down 5.7 percent..

In addition, financial stocks took a hit on Tuesday after Countrywide Financial <CFC.N shares plummeted 27.4 percent, though the largest U.S. home mortgage lender denied it was facing bankruptcy despite more evidence of a weakening U.S. housing market.

For the Dow Jones industrial average .DJI, Tuesday marked the 30-stock blue-chip index's worst five-day start to a year on record on a points basis. The Dow finished the five-day stretch down 675.75 points or 5.09 percent.

Tuesday's losses also took the Nasdaq down 14.6 percent from its 52-week closing high set October 31, putting the index right into what technicians consider to be "bear market" territory.

Investors are increasingly uncertain about the extent of the damage that the economy will likely sustain from the housing slump, with mortgage defaults and home foreclosures set to creep higher in the months ahead.

Secondly, analysts say some investors are becoming skeptical about the effectiveness of the recent interest rate cuts by the Federal Reserve and wonder whether further cuts will help avert a recession.

Last Friday's report showing anemic U.S. job growth in December served to heighten fears of a recession and fueled doubts about the outlook for corporate profits.

"People are looking at a tough road in the first half of the year," said Owen Fitzpatrick, head of U.S. Equity Group, Deutsche Bank Private Wealth Management in New York.

"Initially everyone thought corporate profits would come through unscathed but now in the short period we've had year-to-date, people are starting to question that. People are just viewing the Fed as maybe not quick enough in terms of rate reductions."

A skittish January in stocks suggests that the market could see mounting volatility during the first six months of the year as investors grapple with where to put their money, the analysts added.

"What we're seeing here is people getting back to work after the holidays and being confronted with uncertainty, especially with earnings due out," said Cleveland Rueckert, Birinyi Associates Inc. Stamford.

For those inclined to put a lot of weight behind the predictive powers of historical indicators, the slightly longer perspective of the full month will not offer any solace.

Since 1950, the so-called "January Barometer" has had a 91.2 percent accuracy rate.

(Reporting by Ellis Mnyandu; editing by Clive McKeef)