A Concerning Note to end the Year on…

Stocks close out worst year since 1931; Dow drops 33.8%

Wall Street closed out its worst year since the Great Depression Wednesday — wiping out $6.9 trillion in stock market wealth — after the bursting of the housing bubble began a long chain of events culminating in the worst credit crisis in a generation and a dreadful economic outlook that left investors questioning their faith in stock markets.

Six years of stock gains disappeared as the economy crumbled and markets crashed around the globe, shaking the confidence of professional and individual investors alike.

For the year, the Dow Jones industrial average fell 33.8%, its bleakest since 1931; the Standard & Poor’s 500 index skidded 38.5%; and the Nasdaq composite index posted its worst year ever, with a 40.5% drop.

But the year’s chaos went far beyond the stock market. Credit markets that drive lending became paralyzed, plunging the country further into recession and touching off an unprecedented rush for the safety of Treasury bills, notes and bonds.

Commodities markets, usually ignored by most investors, soared on speculative buying and then collapsed when it became clear that the world economy was in trouble and that record high prices, including oil’s peak above $147 a barrel, were unjustified.

“It was a feeling of flailing,” said Jerry Webman, chief economist at Oppenheimer Funds. “People couldn’t get a grasp because there were not obvious historical precedents.”

A string of financial disasters culminating in the collapse of Lehman Brothers in the middle of the night in September precipitated the third biggest percentage loss ever for the Dow industrials and the broad S&P 500.

By Nov. 20, the S&P had hit an 11-year low, destroying more than a decade of returns for many Americans and wiping out memories of record highs reached just 13 months earlier.

“It was plain ugly out there,” said Kurt Brunner, a portfolio manager with Swarthmore Group in Philadelphia. “All in all, it’s something that I truly hope is once-in-a lifetime thing.”

A deep mistrust grew between banks while growing doubts among investors about the American banking model crippled financial stocks and yanked a key pillar supporting U.S. equity markets.

As the shortage of credit seeped into the broader economy, unemployment rose and consumer spending dived.

Analysts said many investors were looking forward to the start of 2009. Still, there are many unknowns about the economy that could make Wall Street’s recovery from a terrible 2008 a difficult one.

Wall Street is hoping for signs of recovery by the second half of 2009, including evidence the housing market has hit bottom, increased lending by banks and a drop in unemployment accompanied by increased consumer spending.

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