Trillions of Dollars Gone

The Stock Slump of 2008: Wrecking Ball to Wealth

By Heather Landy
Special to The Washington Post
Sunday, January 11, 2009; Page F05

Seven trillion dollars. That's how much wealth evaporated from the stock market last year.

Sure, some of that money may have disappeared by choice, either by those who were smart or lucky enough to foresee crisis and got out, or by those who threw in the towel after repeated pummeling. For the most part, however, the $7 trillion represents an old-fashioned destruction of wealth: a long, relentless decline in stock price valuations.

The wealth destruction went beyond stocks last year. Jeremy Payne, a senior vice president with market research and analysis firm S&P Capital IQ, estimates that about $10 trillion of wealth disappeared in the global housing market. Add that to the $7 trillion in U.S. stock market losses, another $5 trillion or so in equity losses overseas and the sharp decline in values of more exotic investments such as mortgage securities, and "we're probably looking at $25 trillion worth of asset price deflation," Payne said.

The downdraft in stocks began early -- so early that when the Standard & Poor's 500 touched 1471.77 points on the first day of trading in 2008, it turned out to be the benchmark stock index's best level of the year. It was a steady march lower from there over several months. Then came the rapid plunge in September, sparked by the collapse of Lehman Brothers and a gathering dread that the foundation of the global financial system was creaky. A six-week rally late in the year ignited theories that a bottom had been reached in November, and that investors would turn the page in 2009. Stocks surged in the new year's first day of trading, but all of that ground and more was given back last week.

The scenario is radically different from the one investors faced during the last downturn in stocks, in 2001 and 2002, when a euphoric run-up in home prices around the country helped offset the pain of a bear market on Wall Street.

"I think consumers have been chastened this time," said Stu Schweitzer, global market strategist for J.P. Morgan Private Bank. "Now, with their houses and investment portfolios and retirement accounts having been hurt, consumers need to step up their saving."

In November, Americans were saving 2.8 percent of their disposable income, up from 2.4 percent the previous month.

"This will be a year in which cash-strapped consumers continue to hold back on spending," Schweitzer said.

Initially, that will bolster the financial health of U.S. households, but eventually the tightened purse strings will "cause businesses in turn to be strapped for sales and profits," he said, "causing them to cut back on employment and capital spending, which then puts further pressure on consumers."

A cycle like that will keep the stock market "extremely choppy" as investors try to get a handle on the prospects for corporate earnings and the broader economy, Schweitzer said. "I expect the anxiety we saw in the early fall to reassert itself from time to time."

Bob Doll, chief investment officer of global equities at BlackRock, advises focusing on well-financed companies in health care, information technology, energy and other sectors that he said can offer "some independence from the economic cycle." He's more cautious on financials, utilities and materials stocks. While the market overall likely began bottoming out in the fall, Doll said, he is still warning investors to fasten their seat belts for the year ahead.

"Volatility levels are likely to recede from the records set in 2008, but 2009 will continue to be a highly volatile year," he said. "We should see multiple double-digit percentage rallies as well as declines all throughout the year."

But on the whole, he expects the gains to outweigh the drops, leaving the market up by a double-digit percentage for the year. If investors detect in 2009 that corporate profits can begin to recover in 2010, Doll said, then the S&P 500 could end the year north of 1000 points, up from 903.25 points at the end of 2008.

Such rebounds aren't unknown. In each of the past four recessions, the low point for stocks gave way to five-year returns of 14 percent annually on average, S&P Capital IQ's Payne said. That's better than the 9 percent average annual return historically delivered by stocks.

But even if the market achieved a 14 percent annual return for the next five years, that wouldn't return stocks to their October 2007 peak. That can be a sobering thought for investors trying to piece back together their portfolios and to regain a sense of financial stability.

"We've had a quick and spontaneous erosion of wealth," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "There are people that are going to come out of this cycle swearing off stocks, just like they did in the Depression."

But Ablin's not one of them.

As he put it: "History already has shown that you need to just go in, close your eyes and buy the dips."

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