Tthe S&P/TSX composite index in 2008

Canada's stock market endured one of its worst years on record in 2008, losing 35 per cent of its value or about $700 billion, and investors should be prepared to ride out further troubles in the new year as the wounds continue to fester.

The energy, mining and financial services stocks that make up most of the TSX composite index saw their values eroded badly as the recession weakened demand for oil and minerals and the Wall Street financial crisis squeezed the banks.

Canada's main stock market ended the year on an upswing in the final day of trading for 2008, rising nearly 157 points, but that will be of little comfort to many stock investors.

The Toronto Stock Exchange S&P/TSX composite index closed at 8,987.7 on Wednesday; it ended 2007 at 13,833.06.

"I'm glad to see the last trading day of this lousy year," said Fred Ketchen, manager of equity trading at Scotia Capital.

A peak and deep valley

Overall, it was a year that saw both a record high and the worst declines on record at the TSX.

In June, the main stock market had record closing highs just above 15,000, as energy prices soared and overall optimism prevailed.

Then the summer ended, and with it went the sky-high oil prices and investor confidence as U.S. investment bank Lehman Bros. failed, and other pillars of Wall Street wobbled and threatened to crash.

Credit suddenly became more sparse than it had been at any time in recent memory, making it more expensive and difficult for banks and other major lenders to finance business projects and consumer buying.

What initially seemed like a somewhat isolated problem quickly spread to all of the key sectors, including the auto industry, which was already battling a sales slowdown, and to energy companies embarked on costly development projects that hinged on a high oil price .

The impacts were being felt everywhere, even on the consumer staples, which are typically considered relatively safe during recessions.

But consumer staples was also that sector that endured one of the softest drops on the TSX, down roughly 12 per cent on the year.

"Indeed they showed their defensive qualities this year, although because there was no hiding place they went down less than the market as a whole," Gavin Graham, vice-president with BMO Asset Management, said of consumer staples.

"It's things that everybody needs and will continue to buy like food, beverages and medication."

Oil prices, consumer confidence major factors

Economists are split over when the stock markets will start to make a recovery from their recent dismal levels.

Graham is optimistic that 2009 will signal better times for Canada.

"After you've had a year as bad as this one, you've always seen a fairly substantial, double-digit positive return from the markets the following year," he said.

However, several major factors are still up in the air, including the short-term direction of oil prices.

The Organization of Petroleum Exporting Countries (OPEC), which accounts for about 40 per cent of global supply, has been slashing oil production in an effort to reduce supplies and, it hopes, boost crude prices.

Further production cuts could be discussed if OPEC meets in Kuwait City on Jan. 19, and that could send prices higher which would likely give Canadian energy companies a boost on the market.

Also teetering on unstable ground is domestic consumer confidence, which is in danger of toppling the retail sector.

The Conference Board of Canada says that consumer confidence in December was at its lowest level since 1981-82, during the worst post-war recession.

The weakening results are especially alarming because economists say that Canadians are responding to a deepening recession in the United States, which means that they're cutting spending in preparation for a stormy economic climate that doesn't necessarily exist within the country.

Tighter spending could inevitably bring some of the U.S. retail sector's woes to Canada in the coming quarters.

Bank stocks for 'more adventurous'

Graham suggests that cautious investors should consider buying stocks in companies that still pay dividends, such as natural gas pipeline operators TransCanada Corp. and Enbridge Income Fund.

"If you're feeling a little more adventurous, you could even try some of the banks and life insurance companies like Royal Bank, Scotiabank or TD Bank," he said.

The financial sector has been slammed with writedowns related to the credit crisis for more than a year, but some investors have championed the banks nonetheless, saying that traditionally banks will see surefire profit growth over the long term.

Most of the banks have also remained steadfast on their dividend payments, with some choosing to raise capital rather than slash dividends.

Ketchen said there are still significant opportunities on the market in 2009, as long as investors are patient and don't concentrate on one sector.

"Our opinion is that as you move through the latter part of 2009, things will look a whole lot more interesting than where they are now," he said.

He suggested that investors set up a tax-free savings account, a government plan that allows Canadians aged 18 or older to set up an account where they can invest up to $5,000 each year and allow it to grow tax-free.

Investors can use the account to save money through guaranteed investment certificates, bonds, mutual funds and stocks.