The Associated Press spoke with a range of experts including economists and money managers on what's to come.

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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 curbed widespread demand for all but the safest investments, such as government bonds.

With the benchmark Standard & Poor’s 500 down about 40 percent in 2008, investors are hopeful about a rally in the last month and wondering what to expect next year.

The Associated Press spoke with a range of experts including economists and money managers 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 that borrowing will need to increase before the stock market can show a sustained recovery.

The S&P 500 is well off 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, Higgins 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: Diversification is often cited as a defense against market declines. But even investors with holdings in different parts of the market have been hit hard. Is there a limit to its benefits?

A: “This crisis doesn’t mean that diversification is a bad thing. All it tells me is when you have a crisis as we’ve had — which is the largest since the Depression — all asset classes are one,” Higgins said.

He noted that investors who gradually shifted money from stocks to bonds as they moved closer to retirement have fared better.

“You were hurt by this crisis but you wouldn’t be destroyed. Treasurys have done quite well this year. They’re up 13 percent.”

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: Are there reasons to be hopeful?

A: “There is more opportunity I think than I’ve ever seen,” Don Hodges, co-portfolio manager of Hodges Fund in Dallas

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.”