Almost all investors will be glad that 2008 is coming to a close.

The bad news is well known.

•    The combination of too much leverage and excessive speculation in the financial and housing sectors has depressed global asset prices more than any time since the Great Depression.
•    Several major financial institutions couldn’t survive; for others, including the Big Three U.S. automobile manufacturers, the future is uncertain.
•    The country is in the midst of tough recession which began in December 2007.
•    Worries are widespread concerning retirement, jobs, housing and the long-term economic health of the nation.

And yet, even in these hard times, there are good reasons to be hopeful.

Whatever your political views, the next president has pledged a large fiscal stimulus program to help get the economy moving again. This program, which may amount to $700 billion or more, is aimed at improving the infrastructure of the United States. Among other things, these funds may be used to repair and replace roads and bridges, improve energy efficiency, enhance the technology in hospitals, modernize and build schools and expand Internet access.

Over time, these capital improvements will not only add needed high paying jobs to the economy but also improve the overall competitive standing of our country. If the program is successful, it can help lead to increased productivity, cleaner energy, lower health costs and a better educated citizenry.

Various government agencies, including Congress, the Federal Reserve, the Treasury and the FDIC, have taken bold steps to contain and mitigate the current crisis. So far the net effect of these steps has been positive, though, inevitably, mistakes have been made.  

Other countries around the globe are taking similar fiscal and monetary steps to curtail the downside and stimulate their economies.

There is, of course, still much to consider. The recession may be long and deep; 2009 could be a tough year economically as consumers continue to deleverage and virtually all businesses struggle to meet new realities. The massive fiscal and monetary governmental stimulus programs may eventually lead to higher inflation, and there are almost certainly other surprises still lurking on corporate balance sheets.

However, there is less risk now of additional failures among major financial institutions. Mortgage rates on 30-year loans have dropped into the 5 percent range, and many homeowners may be able to refinance into loans they can afford more easily. The price of gasoline has come down substantially. Even with lower expected corporate earnings, stock prices are at more reasonable levels now than they have been.

History tells us that stocks have typically performed very well when the country comes out of a recession. Since 1953, there have been nine recessions, lasting an average of 11 months. On average, the stock market (based on returns of the Standard & Poor’s 500 Index) gained 36 percent from the low point of the recession to six months after the recession ended.

The current recession is in its 13th month, already longer than average. While we can predict neither the length of this recession nor the short-term movement of stock prices, stocks have risen from their lows. Since reaching a low on November 20, 2008, the S&P 500 increased 15.6 percent through December 29.

This recent increase in the price of stocks supports our contention that the best course for most investors is to avoid panic selling and stick with sound long-term plans. Common sense and conservative financial habits still make lots of sense. Live below your means, save consistently and choose an asset allocation which is within your risk tolerance. Diversify globally, rebalance periodically and control your investment expenses and taxes. Avoid speculating when stocks are soaring and avoid selling out when they are sinking.

Invest wisely, and live fully.

We wish you all the best in 2009.

Larry Katz is the Director of Research for Merriman