Despite the nearly 300 point upsurge in the Dow today, with major stock index averages already significantly down and many investors suffering already, the arguments of the bears appear to have held sway in the market’s debate. The major averages have seen falloffs of around 15% in the Dow, a similar plunge in the S & P 500, and the NASDAQ has followed this pattern as well in the last 52 weeks. Professional investors usually consider a bear market to occur at a 15%-20% decline from the year’s highs.
With last year’s development of the subprime mortgage lending excesses, along with the slowing economy and the fear that recession in the US will follow, the markets have reacted accordingly. Markets were affected in a cascading fashion, with the first news of the subprime troubles taking out the homebuilders, whose stocks were crushed in 2007, then the financial institutions that were the foundation of this business, particularly those who had participated heavily in the subprime mortgage lending to homeowners.
With the multiple writedowns by flagship financial giant Citigroup (C: NYSE), the troubles ran down the terrace to the next level, which is the retailers. Slowing retail sales and poor Christmas numbers presage a possible recession, as two-thirds of the US economy rests on the consumers’ wallets.
The debate as to whether we have a bear market at 15% or 20% declines may be academic, as the investors who hold stocks which slide even 10% may be feel that what is technically a correction is a bear market for them.
Where will the markets go from here? Even with Fed cutting rates and expected to again, and the rally today, some major doomsayers have projected the Dow to fall as low as 5,000 points from its high, which would total a massive 35% lopping off the top. That would not be just a haircut for the Dow, but would be closer to a de-capitation.
In John Rothchild’s “The Bear Book,” (John Wiley & Sons, 1998), he warns of the complacency of US investors, particularly small investors, who are not aware of the recurrent history of the bear. Likewise, Sy Harding, in “Riding the Bear” (Adams Media Corp., 1999) point out the inevitability and regular appearance of the bear in stock markets. This history may not always repeat itself, but like most history, it’s something good to know.
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