U.S. Stocks Rise, Trimming Worst Yearly Drop Since Depression

By Elizabeth Stanton

Dec. 31 (Bloomberg) -- U.S. stocks gained for a second day, trimming losses at the end of the market’s worst year since the Great Depression, after fewer Americans filed for jobless benefits.
Home Depot Inc., Gap Inc. and Carnival Corp. climbed more than 1 percent as initial unemployment claims dropped by 94,000 last week to the lowest level in almost two months. Stocks in Europe and Asia advanced, paring the biggest annual declines on record for regional indexes.
“Most of us in the market are going to be very happy for the calendar to tick over to 2009,” said James Gaul, a money manager at Boston Advisors LLC, which oversees about $1.5 billion in Boston. “I’m slightly optimistic on 2009, but I think there’s still some major hurdles to get through, not the least of which is investor psychology. It’s been so bad, and people have gotten burned in such a severe way.”
The S&P 500 rose 1.2 percent to 901.04 at 12:02 p.m. in New York, paring this year’s tumble to less than 39 percent. The Dow Jones Industrial Average added 105.3 points, or 1.2 percent, to 8,773.69, down 34 percent in 2008. The MSCI Europe Index increased 1.1 percent and trimmed its yearly loss to 45 percent. The MSCI Asia Pacific Index gained 0.1 percent, ending 2008 with a plunge of 43 percent.
At its lowest closing level of 2008 on Nov. 20, the S&P 500 was down 49 percent for the year and 52 percent from its Oct. 9, 2007, record of 1,565.15. The plunge came as more than $1 trillion in credit-related losses at financial companies globally dragged the U.S., Europe and Japan into the first simultaneous recessions since World War II.
19 Percent Rebound
The S&P 500 has rebounded 19 percent since its 11-year low on Nov. 20. The gains came as the government rescued Citigroup Inc., President-elect Barack Obama pledged to stimulate growth with spending on infrastructure projects and the Federal Reserve cut interest rates to as low as zero to combat the worst financial crisis in seven decades.
“What’s going to determine the equity market is how deep the recession is going to be,” said Noman Ali, a portfolio manager at MFC Global Investment Management, which oversees $20 billion of U.S. stocks in Toronto. Policy makers “are going to throw everything at it to prevent a deep recession, but it’s still going to be pretty bad because credit markets are still closed and investors are not taking any risk.”
China’s First Yearly Loss
China’s CSI 300 Index fell for an eighth straight day today, capping the gauge’s first annual decline since it was introduced in April 2005. The index tracking yuan-denominated A shares lost 66 percent in 2008 as economic growth cooled and exports shrank.
Stock measures in the other three so-called BRIC nations -- Brazil, Russia and India -- all lost more than 41 percent this year as the global economic slowdown reduced demand for commodities and investors shunned riskier assets.
Financial companies tumbled the most among the 10 main industries in the S&P 500 this year, falling 58 percent collectively for the worst drop in the 19-year history of the index tracking the group. The retreat was driven by banks racking up asset writedowns and credit losses stemming from the 2007 collapse of the subprime mortgage market.
2008 Declines
Lehman Brothers Holdings Inc., once the nation’s fourth- biggest securities firm, filed the largest U.S. bankruptcy in September after its shares lost almost all their value. Merrill Lynch & Co. and Bear Stearns Cos., Lehman’s rivals, were forced into emergency takeovers to avoid collapse, while Goldman Sachs Group Inc. and Morgan Stanley converted to bank holding companies as investors lost confidence in firms that depend on debt-market financing. Morgan Stanley shares slid 71 percent in 2008, while Goldman Sachs fell 61 percent.
Insurers crippled by losses on investments and contracts protecting against debt defaults were among the market’s biggest losers. American International Group Inc., the world’s largest insurer before it was placed under government conservatorship, lost 97 percent.
Automakers slumped as the slowing economy pushed General Motors Corp. to the brink of bankruptcy, sending the nation’s largest car company down 85 percent. Its U.S. sales tumbled 22 percent during the first 11 months of the year, which GM blamed in part on buyers’ dwindling access to credit.
Companies that sell discounted goods posted some of the only gains after consumers reined in spending as the yearlong recession deepened. Family Dollar Stores Inc. jumped 34 percent for the biggest advance in the S&P 500 in 2008. Wal-Mart Stores Inc., the world’s largest retailer, climbed 16 percent and fast- food chain McDonald’s Corp. increased 5.1 percent for the only 2008 gains in the 30-stock Dow average.
Dwindling Profits
Corporate profits have declined for seven straight quarters, according to the U.S. Bureau of Economic Analysis. Should earnings fall through the first half of 2009, as analysts surveyed by Bloomberg project, that would be the longest stretch of decreases since the government started tracking quarterly data in 1947.
The number of mergers and initial public offerings dwindled as falling share prices and frozen credit markets made terms more onerous.
Announced takeovers plunged 43 percent in 2008 to $873 billion from the record $1.54 trillion in 2007, according to data compiled by Bloomberg. Only 43 IPOs raised more than $50 million this year, the fewest since 1979, according to Renaissance Capital’s IPOHome.com.
The S&P 500’s decline in 2008 was the first that exceeded 30 percent since the 39 percent plunge in 1937. The benchmark gauge for U.S. equities lost 23 percent in 2002 and 29.7 percent in 1974, losses that were followed by annual gains of 26 percent and 32 percent, respectively.
Rebound Predicted
Ten of the 11 investment strategists surveyed by Bloomberg expect the S&P 500 to rise next year. The forecasts range from a drop to 874 at Barclays Plc to a gain to 1,300 at UBS AG. The average is 1,056.
While the global economic slowdown weighed on stocks in 2008, U.S. government bonds were on course for their best year since 1995 amid speculation the recession will extend into the first half of 2009. The dollar was set to complete its biggest annual decline against the yen in more than two decades, while the euro was poised for the best year against the British pound since its 1999 debut.
To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.
Last Updated: December 31, 2008 12:03 EST