Optimism is fading that bottom has past

Investors who thought they’d seen the worst of 2008 are seeing reasons for hope vanish one by one.

The optimism that stocks had bottomed in March and would enjoy a second-half rally suffered a serious setback Thursday. Selling slammed the Dow Jones industrial average 358.41 points to 11,453.42, its lowest since September 2006, as fears about oil and the health of major U.S. companies intensified.

The day started out bad and never recovered following a report from Goldman Sachs advising its clients to sell General Motors and Citigroup, both once the preeminent company in their industries. GM stock hit its lowest level in decades, topping off a decline of 45 percent since the Dow set its old 2008 low in March.

But the real problem once again was oil, which soared $5.09 to a record $139.64 a barrel after OPEC’s president said prices could reach $170 by summer and Libya said it might reduce output.

“People are getting nervous,” says Todd Leone, trader at Cowen. “I’m not sure what gets us out of it. Maybe just time.”

But if the past month is any indication, waiting for things to get better could be a painful experience as investors contend with a market that is:

Flirting with, or setting, new 2008 lows. The Dow became the first of the three major U.S. indexes to slice right through its 2008 closing low of 11,740. Investors hoped that low, set after the near-collapse of investment bank Bear Stearns, would serve as the market’s low-water mark. Now, the real focus will turn to the benchmark Standard & Poor’s 500 index, which, despite falling 39 points on Thursday to 1283, is still 0.8 percent above its 2008 low of 1273.

Shredding massive amounts of wealth: After enduring the March scare, investors are hardly in the mood to be retested. But June has been brutal, wiping out 8 percent of the stock market’s value and $1.4 trillion in shareholder wealth, based on the Dow Jones Wilshire 5000. So far this year, investors have lost 11.4 percent of their portfolios, or $2.0 trillion.

Setting up a bad direction going into the second half: With the S&P 500 falling below 1300 Thursday, the index is down 8.4 percent in June so far, putting it on pace to be the worst month since the 11 percent decline in September 2002 at the bottom of the bear market.

Quincy Krosby, strategist at the Hartford, says if overseas markets begin to slow, in part due to rising inflation, that could be what finally causes investors here to panic. Meanwhile, it’s critical for the S&P 500 to hold its 2008 low, or the next solid stopping point might not be until 1140, says Bill Ryder, director of quantitative strategy at Riverfront Investment. “It’s not a good idea to be rash” and sell now, he says. But if the S&P makes new 2008 lows, “that’s pretty bearish, and you have to go down a ways to find support.”