WORLD> America
Street enters '09 with merciful '08 end
(Agencies)
Updated: 2009-01-01 09:44

But the market again stabilized -- until the September bankruptcy of one of the most venerable Wall Street investment firms, Lehman Brothers Holdings Inc., set off a panic on Wall Street and in the credit markets. Banks, fearing that other financial institutions would be unable to repay, stopped lending to each other. The market for short-term corporate debt known as commercial paper was frozen. Interest rates soared.

The only thriving part of the credit markets was government debt. Investors desperate for safety poured money into Treasury issues, particularly short-term bills. The yield on the three month bill plunged to zero, and briefly to a negative return, as investors decided no return or a slight loss was better than the losses on Wall Street or in commodities.

Wall Street's crash in 2008 didn't come in one day like the famous 22.6 percent plunge of Oct. 26, 1987. In many ways it was more nightmarish than Black Monday because there wasn't a quick end to the selling and record volatility.

From Sept. 15 to Nov. 20, when the Dow fell to a close of 7,552.29, the depths it had reached in the bear market of 2002, the blue chips rose or fell by triple digits 41 trading days out of 49.

Relative stability returned to the market during December. But Wall Street's horrific performance has cast a new mold for modern bear markets, often defined as a decline of more than 20 percent, and made expectations for 2009 so low that any reduction in the economic bloodletting would be considered a victory.

"Everyone is so down in the dumps about everything that I do think it gives you the opportunity to have a positive surprise if maybe the economy does turn quicker," said Bill Stone, chief investment strategist at PNC Wealth Management.

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.

But for the near future economists and market experts predict more bad news.

"I have yet to see anyone who anticipates that the first half of next year is going to be rosy," said Dean Junkans, chief investment officer at Wells Fargo Private Bank.

But even a modest improvement in the economy, which has been in recession since last December, could help stocks extend their recent run.

"If you're standing still, walking is a pickup of speed," said Alan Levenson, chief economist at T. Rowe Price Associates Inc.

The government has helped calm markets with a $700 billion rescue of the financial sector and by agreeing to provide financing to the major U.S. automakers. The Federal Reserve slashed its benchmark interest rate to near zero to reduce borrowing costs.

Cheaper oil prices -- it settled at $44.60 a barrel on Wednesday -- are expected to help bolster the economy, draining less money away from consumers and businesses. The declining prices of other commodities, which have come down in response to rapidly waning demand for raw materials around the world, should also help.

In addition, some analysts believe the market will improve because so many investors have pulled out, leaving little room for more selling.