Wall Street on Wednesday closed out its worst year in more than seven decades, battered by a devastating credit crunch that smashed investor and consumer confidence and fueled fears of another Great Depression.
The Dow Jones industrial average plummeted 34% for the year -- the steepest drop since the blue-chip index crashed 53% in 1931, the second full year of the Depression.
Many broader market indexes lost more than the Dow did in 2008 as nearly $7 trillion of the country's stock-market wealth was wiped out.
Despite widespread belief among experts that the U.S. isn't on the verge of a 1930s-like economic collapse, the mammoth market loss taunts the optimists. And it has left many individual investors understandably wary.
Rodney Punt, a 63-year-old Santa Monica retiree who has less than 20% of his investment portfolio in stocks, expresses interest in buying beaten-down shares as the new year begins, but isn't yet sure about risking his money.
"There is still a downward spiral in the real economy," he said. "Is it a recession? Is it a depression?"
As Punt tries to gauge the depths of the economy's woes, what he and other investors decide to do with their money in 2009 could foretell the return of growth: Typically, stocks begin to rally four to seven months before the end of a recession, as investors anticipate a recovery in corporate earnings.
With the current recession already a year old, most economists expect a turnaround in the second half of 2009. If the market follows the usual script, stocks should show a significant pickup beginning in the first quarter of the new year.
A rising market could be a confidence builder for the economy, including for corporate executives who are wrestling with how many more jobs to pare as they cope with sinking sales.
Paul Hickey, a partner at Bespoke Investment Group in Harrison, N.Y., noted that stocks have a track record of rebounding in the year after a harrowing sell-off.
The Dow's 10 worst yearly losses since 1896 were followed by rallies the next year in eight of those instances.
The glaring exceptions: 1930 and 1931.
Some investment professionals caution against putting too much faith in historical trends. This recession has been different from most, rooted in the bursting of the housing bubble and magnified by a credit crunch unlike anything the world has experienced in modern times.
