Stocks close out worst year since 1931; Dow drops 33.8%
NEW YORK -- 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.
Wall Street's stats for 2008 provide evidence of how stunningly terrible the year was:
• Investors lost $6.9 trillion as relentless selling reduced the value of stocks across the market. That amount, measured by the Dow Jones Wilshire 5000 Composite Index, represented 38% of the total value of U.S. stocks at the start of 2008.
• The average price of a share listed on the New York Stock Exchange plunged 45% to $41.14 by the end of the year from $75.01 a year earlier.
• Only two stocks in the Dow ended higher for the year: Wal-Mart Stores and McDonald's. Investors bet discounters like Wal-Mart and inexpensive fast-food restaurants would be the few places consumers spend scarce cash as unemployment soared and the economy crumbled.
•The biggest decliner on the Dow was General Motors, which fell 87.1% for the year as the company was compelled, along with other automakers, to plead for funds from Washington in an attempt to avoid bankruptcy.
• On the S&P, the biggest decliner for the year was insurer American International Group, which fell 97.3% after agreeing to an $85 billion bailout from the Federal Reserve in exchange for government control.
Nonetheless, stocks managed to close the year on an up note Wednesday as fresh efforts to stem the recession from Washington lifted stocks for the second consecutive session.
Trading was light because many investors were out of the market, on vacation or had closed their books for the year.
The market was heartened by a government report that initial applications for unemployment benefits fell by 94,000 to 492,000 for the week ending Dec. 27. The drop, which partly reflects seasonal adjustment difficulties tied to the Christmas holiday, was greater than analysts had expected. But the number of people still claiming benefits has climbed to the highest level since 1982.
The Dow closed up 108 points, or 1.25%, at 8,776.39, while the Standard & Poor's 500 index rose 12.61 points, or 1.42%, at 903.25. The Nasdaq Composite Index gained 26.33 points, or 1.70%, at 1,577.03.
The Russell 2000 index of smaller companies rose 16.68, or 3.46%, to 499.45.
Wednesday's gains couldn't erase the enormous losses of the past 12 months but investors would nonetheless like to hold or add to the sizable gains made Tuesday when financial shares led stocks higher.
"The tone is less onerous for stocks," said Steven Goldman, chief market strategist, Weeden & Co. in Greenwich, Conn. He said lighter volume and relief that the year is over is likely aiding the market's advance.
"There's maybe a little bit of optimism," he said. "We all start the track record over again."
Contributing: Reuters, Associated Press