The Wall Street Journal-20080123-Stocks Show Classic Bear Signals- And This Time- Impact Is Global
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Stocks Show Classic Bear Signals, And This Time, Impact Is Global
A classic bear market starts with a period of exuberance. Then a downturn hits one part of the market, and gradually, the losses spread even to strong companies. A prolonged grind begins.
It happened in the 1970s, when an oil embargo helped puncture the "nifty fifty" big-company stocks, and again in 2001, when the bursting of the Internet bubble caused a broad decline. Now, investors shaken by two days of severe volatility fear another bear market -- only this time, it would fully span the globe.
Even as some world-wide markets recovered yesterday on the back of the Federal Reserve's interest-rate cut, the losses have put some markets already in bear territory by the traditional definition of a 20% drop from a high.
The Russell 2000 small-stock index, bank-stock indexes and the Dow Jones Transportation Average already are down more than 20% from last year's highs. So are benchmark indexes from Switzerland to Taiwan to Chile.
The Nasdaq Composite Index fell 2.04% yesterday and now is 19.8% off last year's high. The Dow Jones Industrial Average is 15.5% below last October's record. Indexes in India and China are getting close to the 20% mark.
Some investors don't think a lengthy bear market is upon us. They believe the worst may be over as the Fed moves aggressively to prop up the U.S. economy. Yesterday, markets around the world bounced back, with London rising 2.9% and Brazil 4.5%. Tokyo shares were up more than 3% in trading this morning. The Dow Jones Industrial Average recovered significantly from big losses shortly after the opening bell, though it still finished the day down a little more than 1%.
Bears see a much longer working-out of the distortions that developed this decade as the U.S., along with many other nations, went through a burst of housing exuberance. Home prices surged far beyond historic levels relative to income. Stocks in home builders, mortgage companies and financial institutions cashing in on the boom all benefited.
Confident U.S. consumers fed -- and were fed by -- a broader boom abroad, particularly in developing markets such as China and India. Exports from Asian countries excluding Japan grew to 55% of their total economic output in 2005 from 45% in 2001, according to the Asian Development Bank. The lion's share of those exports -- about 60% -- end up in the U.S., Europe and Japan.
"We are all still tied together one way or another, either psychologically or through trade," said Hans Utsch, who manages the $10.5 billion Federated Kaufmann Fund, which focuses on U.S. midcap stocks but also has 15% of its portfolio in Indian shares. "Only if you're living in a dream world do you say, 'I'm immune.'"
The current market looks a lot like the beginning of past bear markets, said Paul Desmond, president of market-research firm Lowry's Reports in North Palm Beach, Fla. First, the most troubled stocks decline -- home builders and financial stocks in the current case -- and then others gradually get hit, including small stocks, retailers and technology stocks. Finally even stocks of strong companies are affected.
Japanese companies, for example, are historically cheap relative to profits, which are rising for a sixth consecutive year. Yet Toyota Motor Co., the world's most profitable car maker, plunged 7.2% yesterday.
"There's a crisis of confidence at the moment," said Khiem Do, portfolio manager at Baring Asset Management, which manages about $13 billion in Asia. "In fact, good stocks with strong fundamentals are getting routed because people want to lock in profits."
As a bear market develops, Mr. Desmond says, trading volume and price movement get heavier and heavier for stocks that are declining, and lighter and lighter on the buying side, as more investors look for a way out. When the selling reaches a climax, the bear market is nearing an end, but Mr. Desmond says he doesn't see any sign of a climax yet.
"We feel we have been in a bear market since July. Everything that we have seen since then has just been a progression, almost like a disease that you are monitoring and the disease is spreading," he says. "We are still a long way from a major bottom."
He is watching for a sign of panic selling, but says it hasn't gotten to that point yet. "Everything we are seeing looks like a typical bear market," he says.
Yesterday, even commodities including oil and copper declined, amid concerns about slower world growth. Investors put money into refuges including gold and Treasury bonds, pushing their prices higher.
The Fed's move yesterday was hastened by the world-wide market plunge on Monday, when U.S. markets were closed. While some investors thought the Fed's move looked panicky, others liked it because rate cuts reinforce the Fed's willingness to support the economy despite inflation risks.
One silver lining to the links among world markets: If the Fed rate cuts do blunt the credit crisis and support growth, that should benefit markets world-wide. The U.S. is still by far the biggest, strongest economy in the world. If Americans begin spending and borrowing again, then economies and markets around the world will benefit.
Investors around the world had their eyes on the Fed yesterday. After the Fed news hit, "everyone was trying to buy and our order screens were full. Then within minutes, that euphoria evaporated," said Martin Slaney, head of derivatives at GFT Global Markets in London. European markets continued to gyrate, although they recovered from the day's lows and many finished with gains for the day.
The Dow Jones Industrial Average was down 464.48 points, or 3.84%, shortly after the opening bell. It finished down 128.11 points, or 1.06%, at 11971.19, the first finish below 12000 in more than a year. Total trading in New York Stock Exchange-listed stocks hit 6.42 billion shares, the second-heaviest day ever, after last Aug. 16.
Some more-optimistic investors were beginning to buy already, and others were looking for buying opportunities.
Uri Landesman, a senior portfolio manager at ING Investment Management in New York, said he slept fitfully Monday night, with some of his international stocks showing double-digit declines. Yesterday, he went through all of his holdings and came up with seven potential stocks to sell and to buy, but decided to do nothing -- for now. "Anything I want to sell is already oversold," he says. As for buying, he's waiting to see if markets steady.
Investment strategist Thomas McManus of Banc of America Securities, who last year had urged clients to pull back from stocks, recommended that they buy beaten-down shares, boosting their stock holdings by 5%. U.S. banking stocks, which have been among the hardest-hit in the selloff, staged a recovery yesterday, in part on hopes the rate cut will improve their profit margins.
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Alistair MacDonald in London, Laura Santini in Hong Kong, and Anita Raghavan in New York contributed to this article.
