- The Washington Times - Thursday, January 1, 2009

Wall Street stocks had their worst year since the Great Depression in 2008, with 34 percent to 41 percent losses in major indexes that cut deeply into the wealth and retirement security of Americans.

As a slow-moving downturn in the U.S. economy in the first half of the year turned into a full-fledged collapse in the final four months, the market plunged through a successive series of record-setting losses to levels not seen in years — and dragged down much of the rest of the world with it.

The Dow Jones Industrial Average ended the year down 34 percent while the blue-chip Standard & Poor’s 500 Index lost a stunning 39 percent. Both posted their biggest yearly drops since 1931, during the Depression. The Nasdaq Composite Index fell by a record 41 percent.

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The financial rout — which encompassed not only stocks, but also most bond, commodity and currency markets — left no country or investor untouched. Oil prices fell a record 55 percent after peaking at unprecedented levels over $147 a barrel in July.

European and Asian stock indexes lost on average more than 40 percent, while emerging market giant China’s main stock index plunged 66 percent and Russia’s market collapsed by 75 percent.

For U.S. investors, more than $4 trillion in wealth evaporated seemingly overnight. The stock losses, when combined with quickly eroding home values, left Americans with an estimated $11 trillion less in savings for retirement or economic emergencies like the one in which many suddenly found themselves with the widespread loss of jobs at the end of the year.

In a chain of events that is still reverberating through the economy, the steep and violent losses in financial markets zapped confidence and contributed to the biggest drop in economic output and consumer spending in modern times.

After the battering in 2008, many Wall Street gurus say — or at least hope — that the worst is over.

“2008 has been quite a year, and I think that it is with much relief that we are finally putting it behind us,” said Paul Lennox, corporate treasurer at Custom House, a Canadian investment firm. “Although an economic recession is upon us, the worst of the market’s reaction to the credit and banking meltdown is over, and 2009 should be a year of rebuilding corporate and household balance sheets. Here’s to turning a page in history.”

The stock market tried to muster a lasting rally in its final weeks and ended the year on an up note. News on Wednesday of a drop in mortgage rates to a record low 5.01 percent and a fall in weekly jobless claims sent the Dow rising 108 points to 8,776.

Stocks did stage something of a year-end rally after hitting multiyear lows on Nov. 20. The S&P had plummeted by more than half to an 11-year low on that date, but then rebounded by 20 percent to end the year at 903.

The year-end improvement came amid signs that stressed credit markets were stabilizing after strenuous attempts by the Federal Reserve, Treasury and nearly every other foreign central bank to resuscitate them by showering them with trillions of dollars of loans, capital infusions and interest rate cuts.

The all-out efforts to revive the markets — combined with promises by President-elect Barack Obama to pump another $1 trillion into the economy through a spending and tax-cut package next year — gave hope to investors even as the economic news grew increasingly dire at the end of the year, with everything from housing construction to consumer confidence plummeting to all-time lows.

“Despite what looks like the most severe economic decline since 1982, it appears that investors are starting to build the courage to look over the valley,” said Alexander P. Paris, an analyst at Barrington Research who thinks the market is trying to establish a bottom.

Investors with considerable money stashed in cash accounts have been sitting on the sidelines, he said, and “seem to be as nervous about missing a rally as suffering another sharp market decline. This kind of behavior is fairly typical near cyclical market bottoms that occur long before economic and earnings troughs.”

Jeffrey Kleintop, chief market strategist with LPL Financial, said he is heartened that the market has held on to its gains since Nov. 20, but he does not expect a more robust recovery for several months.

“At least until we pass Groundhog Day, the road to recovery is likely to be a bumpy one,” he said. “What happens further along the road depends on which fork the financial crisis takes us.”

Most likely, “the financial panic that began in September 2008 will subside in early 2009, allowing a normalization of financial markets by midyear,” he said. But further big bank failures, a worsening of the downward spiral in the housing market, or major geopolitical shocks from abroad could lead to another bad year for the market, he said.

By the same token, stocks may rebound more quickly if the extensive measures governments are taking to defuse the crisis start to quickly turn around the economy, he said.

Roger M. Kubarych, an economist with Unicredit Markets, said he is worried about the future of the stock market because of the rise of state-controlled wealth funds in China, Russia, Kuwait and other Asian and oil-exporting nations. These nations now own a significant proportion of the world’s cash available for investment.

These wealth funds have more conservative investment habits than individual investors and mutual and pension funds that dominated the stock market in past eras and usually owned a mixture of stocks and bonds, he said. Sovereign wealth funds, having been stung by their few equity investments last year, have grown more averse to risk and are stashing most of their cash in government bonds, driving the yields on those bonds to nearly zero in recent months.

“The major threat facing the global economy and financial markets is an enormous decrease in the capacity for risk-taking,” Mr. Kubarych said. “The severe global stock market crash, already the worst since the 1930s, is undermining business and consumer confidence, restraining corporate capital expenditures and lowering standards of living.

“Eventually, the stock market will stabilize, but not soon” he said, unless investors revive their appetite for risk, which should be whetted by the “incredible bargains” available in stocks today.

Jim O’Shaughnessy, chairman of O’Shaughnessy Asset Management, said the low stock prices provides the most compelling buying opportunity since 1982.

He told a Reuters investment conference in December that the market appears to be anticipating a depression when the economy is only in an unusually long and deep recession. Conditions are far from as bad as they were in the 1930s, when unemployment was 25 percent and the economy shrank by 30 percent, he said.

“We’re seeing none of that today,” he said. “Much of the damage is out of the way.”

“If we’re in a 24-month recession, we’re in the middle, and right now is when you would begin seeing the stock market recovering,” he said. “Price alone would lead us to conclude that now is a fantastic time for investors with cash to move that cash into the stock market.”

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