Reason for optimism

NEW YORK – The stock market was already straining when 2008 began but few predicted Wall Street would plumb such depths as the year unfolded.

The downturn that began in October 2007 ricocheted to all corners of the market in the past year and damped widespread demand for all but the safest investments such as government bonds. With the benchmark Standard & Poor’s 500 down 40 percent in 2008, investors are hopeful about a rally in the past month and wondering what to expect next year.

The Associated Press spoke with a range of experts on what’s to come:

Q. What signs will you be looking for that the market has bottomed?

A. “I do believe that the credit markets will probably lead us out of this,” said Tom Higgins, chief economist at Payden & Rygel Investment Management in Los Angeles. He said demand for safe-haven investments like Treasurys will need to fall and borrowing will need to increase before the stock market can show a sustained recovery. The S&P 500 is up 18 percent from its Nov. 20 low, but observers say it’s too early to say the worst is over.

Q. What might a recovery look like at first?

A. Investors will “start to differentiate more among performance” and be rewarded more for taking risk, he said. “I don’t think the fundamental investment philosophy will really be altered because of what’s occurred. If people are taking on too much risk, which some individual investors may do, then I think they probably got hurt a lot more.”

Q. How should long-term investors be prepared?

A. “Ignore what’s happened and make your decision on the expectation of future returns,” said Keith Hembre, chief economist at First America Funds in Minneapolis, “not the returns that you’ve experienced in the past because that’s a sunk cost. It’s already happened.”

Q. The market saw enormous volatility from September through mid-November. Will that last?

A. “I think we’ll continue to be buffeted by news events and by emotion,” said Don Hodges, co-portfolio manager of the mid-cap growth Hodges Fund in Dallas. But he said investors shouldn’t be distracted from seeking opportunities to capitalize on beaten-down stocks that represent good values.

Q. Investors are understandably fearful of the market. What should those who have gotten out do now?

A. “I have a very strong conviction that there are a lot of strong buys in the market,” Hodges said. He said a sober evaluation of retailers, airlines, infrastructure companies and energy producers could unearth sizable bargains.

Q. Are there reasons to be hopeful?

A. “There is more opportunity I think than I’ve ever seen,” Hodges said, who’s been in the business nearly 50 years. “We see a lot of good values that even if the market stays neutral are going to go up.” He contends with stocks already down so far there is less risk than there was a year ago. “If I’m wrong at these prices how much am I going to lose? Probably not much.”