NEW YORK (Reuters) - As the stock market heads into the last week of the year, what was inconceivable just 12 months ago is now a stark possibility: 2008 could be the worst year ever for Wall Street.

Traders work on the floor of the New York Stock Exchange in New York, December 23, 2008. REUTERS/Lucas Jackson

The market’s most tracked benchmark, the S&P 500, is down 40.6 percent since last year’s close with only three trading days left in 2008. Given the market’s hair-trigger volatility this year, that’s just one bad day away from surpassing 1931’s 47.1 percent drop, the biggest yearly decline ever.

As it is, the market’s swoon this year will cement 2008’s place in history by at least one measure: eviscerated wealth. A record $7.3 trillion of stock market value has been obliterated this year, according to the Dow Jones Wilshire 5000 index, the broadest measure of U.S. equity performance.

Investors ran for the exits this year as a collapse originally thought to be contained to the U.S. home mortgage sector morphed into a full-blown global credit crisis that now threatens global recession.

The fallout from frozen credit markets permeated all sectors from banks to autos to resources, while unemployment climbed, house prices plummeted and cash-strapped consumers curtailed their spending.

“How to sum up a year that has been plagued with financial crisis in every form and fashion that you could see and, at the same time, we have an economy that’s just imploding on itself,” said Jocelynn Drake, market analyst at Schaeffer’s Investment Research in Cincinnati, Ohio.

“If 2008 proved to be anything, I think it was a reality check for a lot of people.”

A CATACLYSMIC YEAR

Market watchers said it was a year unlike any they have ever seen. Among the casualties: the restructuring, acquisition or disappearance of such heavy hitters as Bear Stearns, AIG, Washington Mutual, Merrill Lynch and Lehman Brothers.

The global downturn forced central banks around the world to mount coordinated interest-rate cuts in an attempt to stimulate growth, pushing rates aggressively lower.

Earlier this month, the U.S. Federal Reserve again cut rates to almost zero and pledged to undertake more unconventional methods to fight off the year-long recession.

While no one is feeling celebratory as the year draws to a close, analysts say the Fed’s offensive has bolstered optimism by showing the central bank is willing to take whatever steps are necessary to get credit flowing again.

REASONS FOR HOPE

The new year will also bring a new White House administration when Barack Obama is sworn in as president in January. Hopes for a new stimulus package have also buoyed the market of late as Obama’s picks for his economic team have been greeted favorably.

Obama is expected to unveil a government spending program in areas including infrastructure building to reinforce boosts from the Fed.

Earlier this week, Vice President-elect Joe Biden said the new administration was close to nailing down a deal with congressional Democrats on the package, which aims to generate 3 million new jobs and could cost $775 billion or more.

“2009, if it goes according to plan, will be a transition year from one of major disasters and financial distress to one of repair and gradual recovery,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

“Looking into the new year, the economic data is likely to continue to be very weak. However, the question really is: ‘How much of that bad news is already priced in, and how long will it last?’”

WHEN SANTA SKIPS TOWN

The lack of a significant year-end rally so far does not bode well for the market in the new year. With stocks unable to mount a Santa Claus rally this week, analysts said they will be looking to next week for a clue as to what to expect in 2009.

“A Santa Claus rally can offer clues as to what January, and thus the next year, might bring,” said Bruce Zaro, chief technical strategist at Delta Global Advisors in Boston.

Conversely, the absence of a rally could be a sign of more hefty losses to come, Zaro added.

Trading is expected to continue to be light next week, when markets will be closed on Thursday for the New Year’s holiday.

Among economic data on tap is Tuesday’s report on December consumer confidence index from the Conference Board, expected to read 45.0 versus 44.9 in November, according to a Reuters poll.

The Institute for Supply Management’s manufacturing index for December is expected on Friday, and is anticipated to show a reading of 35.5, down from November’s 36.2. A reading above 50 points to expansion, while a reading below 50 shows a contraction.

(Editing by Jan Paschal)