Historical 2008 : US Economy at it worst

Historical 2008 : US Economy at it worst


This was the worst year for equities and many other investments since the depths of the Great Depression. The Dow Jones Industrial Average fell 34% in 2008, its biggest loss since 1931. The biggest loser on the blue-chip index for the year was General Motors Corp. (GM), which fell more than 87% to $3.20 and needed an emergency loan from the government just to make it to 2009.

The next biggest loser was Citigroup (C), one of the world's biggest banks by assets that also required a government rescue late in the year. Citi fell about 77% to $6.71, weighed down by the same load that sunk Lehman Brothers Holdings and effectively brought down Bear Stearns: billions of dollars of bonds linked to mortgages.

The broader Standard & Poor's 500 ended the year down 38%, also the largest loss since 1931, as the financial crisis spilled into the broader economy. The technology-oriented Nasdaq Composite shed 40.5%, the worst performance in a history dating back to 1971, edging out the 39% loss in 2000, when the tech bubble burst.

Bad loans and a string of banking failures resulted in the financial sector being the weakest of the S&P 500, losing 58% in 2008.

That was the day the government allowed Lehman Brothers Holdings to fail. The bankruptcy sent shock waves through the financial system, causing the credit crunch to become a full-fledged dollar drought. Corporations could not borrow the money they needed to make payrolls or invest in projects. Ultimately, consumers slowed spending over job and housing worries.

The combination of the credit crunch and consumer-spending slowdown sent companies as diverse as chicken processor Pilgrim's Pride (PGPDQ) and electronics chain Circuit City (CCTYQ) to bankruptcy court.

Defaults rose, and yields in the bond market reached record levels. In early December, risk premiums that investors charge on risky corporate bonds, or junk bonds, topped 20 percentage points over benchmark U.S. Treasury rates, according to Merrill Lynch's closely watched High Yield Master II Index. The number implied a default rate of around 22% over the next year, according to market watchers, higher than the realized record of 15.4% in 1933, the depths of the Great Depression.

At the start of 2008, the two-year yield was a bit below 3%. It dropped to a historic low of 0.569% in December and closed out the year around 0.75%. Treasurys earned 14.59% year to date as of Tuesday, according to Barclays Capital U.S. Treasuries Index. This year represents Treasurys' best year since 1995, as measured by the index.

In another sign of risk aversion, the commodities bubble burst this year. Inflation expectations had drawn speculators in hedge funds and elsewhere to commodities futures and stocks, sending oil to a peak of $147 a barrel. Fears that a worldwide recession would reach the shores of even fast-growing nations like China caused oil to turn around. The flight of the hedge funds, forced by the financial crisis to sell investments they had made on borrowed money, exacerbated the crash for oil and other commodities.

The materials sector was the second weakest in the S&P 500, losing about 48%, while energy stocks declined 37%. None of the 10 sectors in the S&P 500 recorded gains on the year. The one that fell the least was consumer staples, off roughly 18%. Investors found some consolation in stocks that specialize in serving consumers when money is tight. McDonald's Corp. (MCD) added 45 cents, or 0.7%, to $62.19, and gained 5.6% on the year; Wal-Mart Stores Inc. (WMT) added $1.01, or 1.8%, to $56.06, up 18% for 2008. Family Dollar Stores Inc. (FDO) rose 56 cents, or 2.2%, to $26.07, and rose 36% this year.

Some of those who were bears going into 2008 remain bears for 2009. One was not convinced that government bailouts alone can save an economy, or a market.