With the Dow sliding into a bear
market on Wednesday, the dark days on Wall Street are far from
over, amid record oil prices, struggling consumers and the
never-ending credit crisis.
The Dow became the second major U.S. index to enter a bear
market, crossing the critical threshold of a 20 percent decline
from its peak, following the Nasdaq in February. The broader
S&P 500 (.SPX) is a little more than half a percent from the
same fate.
News on the struggling economy could get much worse, with
Thursday's government report on June payrolls seen as
make-or-break. Any further worsening in the employment picture
could stir more gloom about the health of consumers.
"I think we're seeing a capitulation of sorts and a sign
that the market is really on its knees. The market needs a
positive catalyst. It could be the jobs number," said Marc
Pado, U.S. market strategist and technical analyst at Cantor
Fitzgerald & Co in San Francisco.
"Crude has a knife in our back and it keeps twisting," he
added.
Oil jumped to a record close of $143.57 a barrel on
Wednesday. Add worries about slumping home values and a
worsening corporate profit picture, and the outlook for Wall
Street gets bleaker.
Based on historical patterns of bear markets, Wall Street's
current slide has some ways to go before it plays out.
Since 1900, whenever the Dow has fallen into a bear market,
it has on average shed 30 percent of its value for the duration
of the slump. Bear markets have tended to last just over a
year.
The Dow's worst bear market occurred in the early years of
the Great Depression, stretching from April 17, 1930, to July
8, 1932. The industrial average lost 86 percent of its value in
that period, falling from 294.07 to a bottom of 41.22.
The 30 current components of the Dow have shed a collective
$1.1 trillion since the index's record close on October 9,
2007.
"When you look at the bear markets that have taken place
since 1960, the average decline in the Dow has been 31 percent
and average duration 14 months. Using that standard there's a
long way to go," said William Sullivan, chief economist at JVB
Financial Group, in Boca Raton, Florida.
At Wednesday's close the Dow was down 20.8 percent from its
record close set on October 9, 2007, while the S&P 500 was down
19.4 percent from its record also set last October.
The bulk of the damage in the Dow stems from slides in the
shares of General Motors (GM.N), grappling with slumping auto
sales as soaring gasoline prices hurt demand for highly
profitable trucks and SUVs, and American International Group
Inc (AIG.N), the world's largest insurer, which has been
buffeted by fallout from the mortgage crisis.
GM and AIG are the Dow's worst performers year-to-date,
down 59.9 percent and 54.1 percent, respectively.
On Friday, Merrill Lynch said GM will need to raise as much
as $15 billion to shore up its finances and said its bankruptcy
is "not impossible" if the U.S. auto market continues to slump.
Meanwhile, the Nasdaq ended down 21.2 percent from its
52-week closing high set October 31, 2007, a drop that also
technically signifies a bear market run for the index.
The 20 percent drop in the Dow industrials from its record
close "is just kind of an artificial line in the sand. It's
more a validation that all hell has already broken," said Keith
Hembre, chief economist at First American Funds, Minneapolis.
(Additional reporting by Ellen Freilich, Kristina Cooke and
Lynn Adler; Editing by Leslie Adler)
Related posts:
- Dow crosses into bear market territory (Reuters)
- Market ends lower, Dow on cusp of bear market (Reuters)
- As oil nears 20 percent “bear” market, bulls unfazed (Reuters)
- Investing and the Bear Market: Consortium of Financial Professionals Gives Advice on Ten Smart Moves to Make in a Bear Market
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