Dow at risk of first down year since 2008

The up-and-down year on Wall Street has put the Dow Jones industrial average at risk for its first year of negative returns since the financial crisis in 2008 as Wall Street attempts to boost the blue-chip index back in to the black in the last few days of trading in the year

In Wednesday trading, stocks jumped as the Dow finished up 1.1% to 17,602. The 185-point gain moved the blue chips closer to their 2014 close of 17,823.07.

The stock rally also pushed the Standard & Poor's 500 index back into positive territory for the year as it rose 1.2% to 2064, topping its 2014 close of 2058.90. Gaining 0.9% was the Nasdaq composite, which was already positive for the year.

Heading into Wednesday’s trading session and after back-to-back days of triple-digit gains, the Dow was down 2.3%  for the year. It's now 1.2% below the 2014 close.

If both well-known U.S. stock gauges did finish in the red this year, it will mark the first down calendar year for both indexes since the bull market began in 2009. The U.S. stock market’s last negative year was back in 2008, when the Dow plunged nearly 34% and the large-company S&P 500 cratered almost 39%. (The S&P 500 declined 0.04 points in 2011, but Wall Street deems that fractional loss a "flat" year.)

Stocks have been hurt in 2015 by a string of headwinds that have caused the market to trade sideways. The frustrating year began with solid gains and record highs in May followed in August by the first 10% “correction” in four years to a market currently sporting modest losses with a week and a half to go in the year.

Wall Street stock strategists tracked by Bloomberg expect the S&P 500 to rebound next year, however. Based on 2016 projections released by 14 strategists, the average year-end 2016 price target for the S&P 500 is 2216, or up nearly 9% from Tuesday's closing level of 2039.

Market headwinds have been plentiful this year. Angst over the timing of the Federal Reserve’s first interest rate hike since 2006 (which finally came last week with a quarter point increase) began in March when Fed chair Janet Yellen first hinted that hikes in 2015 were coming. The summer swoon was sparked by fears of an economic collapse in Greece and exit from the eurozone, which was averted by a last-minute bailout. Add in the spring biotech stock plunge, the stock bust in mainland China in July, Beijing’s surprise devaluation of its currency in August, Turkey’s downing of a Russian fighter jet over Syria in November, terror attacks in Paris and California in late fall, and crashing oil prices – and it’s clear why investors haven’t been taking out second mortgages to buy U.S. stocks.

Wall Street is still digesting the impact of the Fed's new rate hike cycle on future economic growth in the U.S., stock market valuations and the value of the dollar, which has strengthened in 2015, making U.S. multinationals less competitive.

But heading into the week, when the Dow was down nearly 4% in 2015 and the S&P 500 was off 2.6%, the odds of the stock market finishing the year in positive territory were "low," according to an analysis done by Edward Yardeni, chief investment strategist at Yardeni Research.

At the start of the week, Yardeni noted that “the S&P 500 needs to rise 53.36 points, or nearly 2.7%, to 2058.91 in the last eight trading days to beat 2014’s closing price of 2058.90.”

He added: “How likely is it that we could see a year-end rally of that magnitude? It’s possible, but not likely given the market’s performance since 1928. The S&P 500 has registered an eight-day year-end rally of at least 2.7% only 15 times, or in 17% of the 87 years since 1928.”

The rally to start the week, however, has put both the S&P 500 and Dow within striking distance of positive gains for the year.

JJ Kinahan of TD Ameritrade took a look at the futures market on Tuesday to place odds on the S&P 500 turning positive by year-end.

"As we look at the probability of us getting to 2060 on the S&P 500 and up on the year, the probability of this happening as priced in the options market is almost 25%," he says. "There is a 48% probability that we can trade up to that level between now and year-end."

Sure, it’s been "plain flat" market in 2015, but that doesn’t necessarily rule out a Santa Claus rally, says David Kotok, chief investment officer at Cumberland Advisors, adding that a late-year rally could be a head fake as volatility picks up early next year as investors react to diverging monetary policy in the U.S. and abroad.

On the bright side: a negative return in 2015 “is a better set up for early 2016,” Kotok argues.

Adam Shell on Twitter: @adamshell.

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