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BECAUSE 2008 ALREADY SUFFERS A SURFEIT of gloom, let’s begin with a little good news: Wall Street’s top strategists believe — or hope — that the U.S. stock market has already absorbed the worst of the selling pressure this year, and will start to recover in 2009.

2009 Outlook: Stocks will scale sharp peaks and brave deep valleys to reach higher ground in 2009. John Patrick for Barron’s

The not-so-great news: Any progress might be limited.

That’s not to say there won’t be violent rallies and sharp pullbacks along the way. An urgent scramble to dump risky assets and hoard capital this year triggered a crisis of credit — and confidence — that wiped out more than half of the stock market’s value. And while stocks quickly rebounded 18% from their late-November low, the dozen strategists and chief investment officers surveyed by Barron’s expect the Standard & Poor’s 500 index to finish 2009 near an average of 1045, or 18% above today’s level of 888.

Such a forecast may not seem very modest at first — until you consider strategists’ vocationally bullish bent, how this volatile market can easily cover 18% in mere days, and all those statistics promising massive gains a year after stocks first slip into — and presumably bounce out of — a bear market. In fact, a majority of the surveyed strategists have pinned their 2009 year-end targets within a narrow 50 points of the 1,000 mark as though there’s safety in numbers.

The source of their circumspection: the uncertain economy. Nearly everyone expects the U.S. economy to worsen as companies cut costs and lay off workers (on top of the 1.25 million jobs already eliminated from September to November), and as economists pencil in gross domestic product declines of 4% or more for the fourth quarter of 2008 and early 2009. And while the consensus hopes for a second-half rehabilitation, no one knows when a lasting recovery will take hold. Indeed, 10 of the 12 firms surveyed see the U.S. economy contracting in 2009.

So why should stocks rise in the face of such ambiguity? For a start, the strategists hope that a stock market that has already fallen 52% from its 2007 peak to its Nov. 20 low has discounted much of the deterioration still to come. With more than 37% of mutual-fund assets recently parked in money-market funds, the highest level since 1991, there’s ample cash for bargain hunting should stocks dip below a certain threshold. Hopes run high that cheaper energy costs will support consumer spending, and — most important — that the deep freeze in the credit markets triggered by Lehman Brothers’ collapse will continue to thaw. And everyone is counting on the government’s aggressive policies to help stop the rot.

The size of global policy response to stabilize both the financial system and the growth outlook is virtually unprecedented, says Morgan Stanley chief global equity strategist Abhijit Chakrabortti. It does not appear likely to us that equity markets will fall substantially from here, given growth expectations have been substantially lowered, growth data are depressed and there is a high level of skepticism surrounding the ability of policy-makers to salvage the financial system and stabilize growth.

A year earlier, forecasters made the mistake of placing too much faith in the Fed — back then, they believed the Federal Reserve’s interest rate cuts and thriving foreign economies could help the U.S. stave off a recession. This time around, their trust may be more justified: at least the government is no longer in denial about the economic threat, and fighting deflation has become the urgent priority for governments around the world. Just last week, the Fed cut benchmark rates below a historic 0.25% and promised a vast array of lending programs to consumers and businesses.

AT THE SAME TIME. investor expectations have been quashed — the bar is set low when today’s yardstick is the Great Depression. Witness the lunge for safety and near-zero yields on short-term Treasuries. People are practically paying the government to hold their money — if that’s not a sign of negative sentiment, I don’t know what is, says Jason Trennert of Strategas Research Partners.

No one thinks wild swings will subside quickly from record 5%-a-day moves in October, but the downward plunges have at least been replaced by volatility of the sideways variety. The market can rally fiercely and then pull back some, says Citigroup’s chief investment strategist Tobias Levkovich. Over the eight years after the 1932 bottom, there were at least five rallies that averaged 93%. The 1974 bear-market bottom spawned no fewer than six rallies over the next eight years averaging 32.5%. The surges, however, were followed by retreats, and Levkovich sees the choppy S&P 500 ending 2009 at 1,000.

IF THESE STRATEGISTS ARE RIGHT. the 39% gain from the Nov. 20 low of 752 to 1045 might mark the tentative start of a new bull market — or a big bounce within an extended bear market. Even those who expect the S&P 500 to hold its Nov. 20 low see that threshold being tested in 2009 — not immediately, since fresh allocations toward decimated stocks will provide a momentary lift. But buyers’ resolve will be tested as early as February, when companies reporting messy fourth-quarter earnings offer a peek at the damage they’ve sustained.

Also, I think a lot of bad decisions might have been made in the record volatility of this year’s second half, and odds are there could be another surprise, warns Thomas Lee of JPMorgan. Potential threats that might rattle the market include a collapse of, say, a big U.S. industrial company or a foreign bellwether, or debt defaults by a sovereign power. Lee sees a range-bound first half, before a possible second-quarter test spawns a constructive second half. All through 2009, Wall Street expects the Fed to keep borrowing costs at extremely hospitable levels to goose spending, and at least nine strategists (or their economists) see benchmark rates kept below 1% even a year from today.

The flight to quality that drove 10-year Treasuries’ yield down toward 2% last week also smacks of a crowded trade and feels a little overdone, says Alison Deans, Neuberger Berman’s chief investment officer. The firm’s portfolio managers increasingly are scouring investment-grade corporate debt — sporting attractive yields above 7% — to park their money while browsing for stocks. In fact, 10 of the 12 strategists expect Treasuries to back off next year and for the 10-year yield to reverse its slide; the holdouts are JPMorgan, whose bond strategists see the benchmark yield finishing 2009 at 1.65%, and Merrill Lynch. (For Barron’s bond-market outlook, see Current Yield .)

Anyone looking for change in 2009 will not be disappointed. As America weans itself off debt, and as the government begins to own banks, insurers or even automakers, a tectonic shift occurs with the transfer of leverage from the private to the public sector, says Christopher Hyzy, chief investment officer of U.S. Trust, Bank of America’s private wealth-management unit. The world’s gross imbalances will begin to moderate. For example, developing Asia will see savings decline and spending rise, while the West, anxious to mend its balance sheets, will save more and spend less.