THE devastating declines in most investments last year were relentless and persistent and set off by no single trigger, so it seems wrong to call what happened a crash. It may be fair to say, though, that these worst markets in at least two generations succumbed to the effects of a financial crash diet.
Credit is the nourishment that keeps markets and economies functioning. Too much of it created bloated, unhealthy expansions in preceding years, and the sharp reduction in its availability in 2008 resulted in plunges in domestic and foreign stocks, real estate, commodities and corporate bonds — almost any asset not considered free of risk.
No stock market escaped. The research firm MSCI Barra compiles indexes for 67 markets around the world, and not even one showed a gain last year. Tunisia, with a loss of 8.7 percent, came closest to breaking even.
It may seem hard to believe — and small consolation when fund shareholders open their year-end statements and survey the damage — but American stocks were among the standouts. The Standard & Poor’s 500-stock index lost 38.5 percent, compared with a decline of 45.2 percent for an MSCI index of global stocks that excludes the United States.
Most of the year’s decline here was in the fourth quarter, as investors concluded that government efforts to rescue the financial system and economy were insufficient, and insufficiently thought out, to get the job done and prevent a severe recession. The S.& P. 500 fell 22.5 percent in the quarter.
That sent the domestic equity funds in Morningstar’s database to an average loss of 22.6 percent for the quarter and brought the full-year decline to 36.7 percent. The average foreign stock fund fell 21.1 percent during the final quarter and 42.9 percent for the year, dragged down especially by the performance of emerging markets.
There was at least one place to hide last year, and it became awfully crowded. Treasury securities soared in an overbooked flight to safety as yields descended to their lowest levels in more than a half-century.
Funds specializing in long-term government bonds had an average gain of 17.5 percent in the fourth quarter and 20.4 percent for all of 2008. It was the best performance by far among the 50 or so asset classes that Morningstar follows, other than funds that bet on a declining stock market, and one of the few that ended ahead for the year.
The extreme market action and the uncertainties hanging over the economy and the financial system have made strategists and portfolio managers more circumspect than usual when issuing forecasts. Getting a handle on 2009 is tricky because they are still trying to make sense of 2008.
“No one has ever seen these kinds of readings,” said James Swanson, chief investment strategist for MFS, the Boston fund manager.
He and other advisers highlighted one reading that would be encouraging under normal conditions: the waves of urgent selling have left stocks remarkably cheap by longtime benchmarks.
“Every single traditional measure shows that the stock market is ridiculously undervalued,” said Jonathan Golub, who runs an investment strategy firm, Golub Market Insights.
Mr. Golub is reluctant to proclaim the market a bargain, however, because growing concern about the most insidious economic plague — deflation — could keep the public from investing, borrowing or spending.
“The deflationary psychology hasn’t played through yet,” he said. “Once you get into that negative spiral, it’s extraordinarily difficult to break it.”
Investors often bank on the future as soon as they see a glimmer of clarity and hope, so stocks may rally when the economic backdrop offers little reason for it. James Margard, chief investment officer of Rainier Investment Management, expects another expedition up the wall of worry this year.
“Unemployment will get worse, we will continue to see more bankruptcies, and the consumer will continue to be stressed,” he said, but he predicted that the market would be increasingly upbeat nonetheless.
Mr. Margard highlighted “certain signs of encouragement” already, including the improved affordability of housing and the savings for motorists now buying gasoline for a fraction of its summer 2008 cost. The impact of near-zero interest rates after Federal Reserve cuts should help, too, he said, along with the hundreds of billions the Treasury has spent or will spend to stimulate the economy.
“There hasn’t been a recession in modern history where the markets didn’t bottom in the middle of it,” he said.
The middle of a recession is where Mr. Margard expects certain stocks to come into their own, including the Apollo Group, a provider of adult education, and a consultancy — Watson Wyatt Worldwide — whose services should be in demand among nervous, befuddled employers.
Two companies in the railroad industry, Norfolk Southern and Westinghouse Air Brake Technologies, or Wabtec, should do well “if we’re within a year of the end of the recession,” he said.
As it turns out, we’re no longer within a year of the start of the recession. The National Bureau of Economic Research determined only last month that the economy was in recession — and that it began in December 2007.
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