'08 loss worst since 1930s

The Baltimore Sun

The stock market closed out 2008 yesterday, finishing a year with the worst performance since the Great Depression after weary investors faced a deep recession, the fallout of the subprime mortgage mess and some of the most volatile trading days in history.

But despite the huge sell-off and investor confidence hitting rock bottom, some market analysts predict that the worst might be over.

The Dow Jones industrial average dropped 33.84 percent, its third-largest decline ever and the biggest decrease since 1931. The Standard & Poor's 500 index, a broader measure of market performance, lost 38.49 percent, just slightly better than the severe decline of 1937.

And the Nasdaq composite index, created in 1971, posted its worst year with a 40.54 percent plunge. The Nasdaq's previous record decline occurred in 2000 when the technology-laden index lost 39.3 percent after the Internet bubble burst.

"It was a horrible year for the economy, for the stock market," said Al Goldman, chief market strategist for Wachovia Securities in St. Louis. "The destruction of personal wealth has been unprecedented since 1929."

With nearly $7 trillion in stock value wiped out last year, many investors considered it a success if they had losses that weren't as bad as the market benchmarks. Severe losses to 401(k)s, mutual funds and pensions led many investors to delay retirement or other financial plans.

On the last day of trading yesterday, all three major indexes posted gains. The Dow rose 108 points to close at 8,776.39. The S&P; rose 12.61 to end at 903.25. And the Nasdaq gained 26.33 to close at 1,577.03

Last year was full of bad news, much of it exposing the high-risk gambles that some of the best-known firms on Wall Street took during the real estate bubble. A credit crunch continued throughout the year, hobbling businesses and consumers. Unemployment rose; employers cut 533,000 jobs in November alone. And the economy was officially deemed to have been in a recession since December 2007.

Maryland wasn't immune.

Baltimore's only Fortune 500 company, Constellation Energy Group, stood on the brink of bankruptcy in September until Warren Buffett's MidAmerican Energy Holdings rode to the rescue with $1 billion and a plan to buy the utility at a bargain-basement price. Constellation rejected that deal last month, choosing instead to sell half its nuclear power business to a French company. If approved by regulators, the deal will allow CEG to remain independent.

The state also is in line to lose its largest independent bank, Provident Bankshares in Baltimore, after it agreed last month to be sold to rival M&T; Bank.

Maryland stocks fared worse than the overall market. The Bloomberg index of 82 Maryland stocks was down 42.09 percent for the year.

Maryland's business landscape is heavily composed of small biotech companies and financial firms, both of which took a severe drubbing this year, said James Hardesty, president of Hardesty Capital Management in Baltimore.

"Smaller capitalized stocks in general, not just in Maryland, have suffered disproportionately in this decline, which is not uncommon in big bear markets," he said

Among the year's results for Maryland financial stocks, T. Rowe Price Group was down 41.79 percent, ending at $35.44. Legg Mason Inc., suffering from weak fund performance, investor redemptions and having to shore up ailing money market funds, dropped about 70 percent, closing at $21.91. First Mariner Bancorp, hobbled by bad loans, was off about 87 percent to close at 72 cents.

Much of the turmoil hit in September: The government took over mortgage giants Fannie Mae and Freddie Mac; investment bank Lehman Brothers Holdings filed for bankruptcy protection; Bank of America picked up Merrill Lynch in a fire sale; federal officials bailed out insurance giant American International Group; regulators brokered the emergency sale of the nation's largest thrift, Washington Mutual; and the oldest money market fund "broke the buck," a rare occurrence in which investors lose principal.

Any one of these events would be enough to rattle the stock market in a normal year. But coming all at once, the events led to panic selling and a highly volatile market.

During the past three months, there were 18 days when the S&P; 500 index moved up or down by 5 percent, said Howard Silverblatt, senior index analyst for Standard & Poor's.

"In the prior 53 years, we had 17," he said.

And of the 20 biggest daily point losses in the Dow's 112-year history, 13 of them occurred in 2008. That includes the two largest point drops - 777.68 on Sept. 29 and 733.08 on Oct. 15.

Among the Dow's 20 largest daily point gains of all time, 13 of them also happened last year, including the 936.42 jump on Oct. 13.

"It's embarrassing to tell people what you do for a living," said Andy Brooks, head of equity trading at T. Rowe Price Associates in Baltimore. "They think you are working at the O.K. Corral or a gambling casino."

Market losses were felt across the board. Only two of the 30 blue chip stocks that make up the Dow - Wal-Mart and McDonald's - ended in positive territory last year as consumers curbed spending.

For once, a diversified portfolio didn't help.

"People who had fairly conservative portfolios, or thought they had a conservative blend of stocks and bonds, got killed this year," said Chuck Carlson, chief executive of Horizon Investment Services in Hammond, Ind. "It was a tsunami. There was no place to hide."

For many investors, the best protection was to hold cash or Treasury securities.

But even Treasury yields shrank as investors shunned corporate and municipal bonds and fled to the safety of government-backed debt.

After Lehman's failure, the yield on short-term Treasury bills briefly went negative, said Dick O'Brien, executive vice president of Folger Nolan Fleming Douglas in Hunt Valley. In other words, investors were willing to lose a little to park their money with the government. Now the yield on Treasuries maturing within a year is slightly above zero.

The yield on the popular 10-year Treasury dropped from 4.02 percent at the start of last year to about 2.25 percent by year's end.

"You have to go back to World War II where you really had yields that were as low as they are today," O'Brien said.

As much as investors want to put 2008 behind them, the pain of that year might not be over just yet. Many of the job cuts announced late in the year haven't yet taken effect, Silverblatt said. Companies slashed dividends by $40 billion last year, with many of those cuts coming in the fall. So the full brunt of that lost income won't be felt by investors until this year, he said.

Plus, whenever there is a change in the White House, particularly a switch in parties, there are two years of pain as priorities readjust and then two years of benefits, Silverblatt said.

Others are more bullish about this year, with some citing optimism about President-elect Barack Obama and his economic team.

Stocks also are cheap now, which might lure investors back into the market. "We are having a big going-out-of-business sale, and the country isn't going to go out of business," Hardesty said.

The market isn't expected to sustain its 2008 volatility.

"It would be almost impossible," said Horizon's Carlson. "It takes a lot of energy to sustain that kind of volatility."

Wachovia's Goldman and others say the 2008 bear market - so far the fifth-worst on record - likely hit bottom on Nov. 20.

"The desperation was the worst I have seen in 48 1/2 years of being a professional student of the market," Goldman said. "You could almost hear people say, 'Get me out at any price.' "

If November was the bottom, then history would indicate happy returns this year.

The worst bear market on record hit bottom during the presidential election year of 1932, said Jeffrey Hirsch, editor-in-chief of the Stock Trader's Almanac. That year, an unpopular Republican president was replaced by a Democrat, Franklin D. Roosevelt. And the next year was one of the Dow's strongest, with the index surging nearly 67 percent.

No one is predicting that kind of year, but any gain would be welcome.

wide swings

Greatest Dow Jones industrial average daily point gains of all time

1. Oct. 13, 2008 +936.42 +11.08 percent

2. Oct. 28, 2008 +889.35 +10.88 percent

3. Nov. 13, 2008 +552.59 +6.67 percent

4. March 16, 2000 +499.19 +4.93 percent

5. Nov. 21, 2008 +494.13 +6.54 percent

Greatest Dow Jones industrial average daily point losses of all time

1. Sept. 29, 2008 -777.68 -6.98 percent

2. Oct. 15, 2008 -733.08 -7.87 percent

3. Sept. 17, 2001 -684.81 -7.13 percent

4. Dec. 1, 2008 -679.95 -7.70 percent

5. Oct. 9, 2008 -678.91 -7.33 percent

Source: Dow Jones & Co.

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