Stocks Show Classic Bear Signals,
And This Time, Impact Is Global
By E.S. BROWNING and JOANNA SLATER
January 23, 2008
Even as stocks recovered somewhat on the back of the Federal Reserve's surprise interest-rate cut, investors shaken by two days of severe volatility worried that the world still faces a bear market.
The Fed news helped some European and South American markets, 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%.
The similar reaction to the U.S. rate cut marked another sign of how tightly linked international markets have become. Markets around the world plunged in unison on Monday, when the U.S. was closed, on fears that a slower U.S. economy and its weakened financial system could have world-wide consequences.
In many ways, this is what a classic bear market looks like: After a long period of exuberance, a downturn hits one part of the economy -- in this case, the housing market and mortgage-backed securities. Eventually, that leads to broader losses, even for strong companies, and markets begin a prolonged grind downward.
In this decade, the exuberance wasn't limited to the U.S. Markets in developing nations like China and India have performed far better than the U.S. market in recent years -- and took some of the biggest hits this week. (The Fed's action came after Asian markets closed yesterday.)
The Nasdaq Composite Index fell 2.04% yesterday and now is 19.8% off last year's high, putting it on the verge of a bear market, traditionally defined as 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. The Dow industrials are 15.5% below last October's record. Benchmark indexes in Switzerland, Australia, Singapore, Taiwan, Norway, Chile and Poland already have fallen more than 20% from their highs of recent months. Indexes in India and China are getting close to that mark.
"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. mid-cap 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.'"
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.
Until recently, just about all the world's stock markets were rising in tandem -- even including some in Africa. That has helped bring prosperity to people world-wide. But when U.S. markets started to unravel, there were few places to hide. After their big gains, all the world's stock markets were susceptible.
"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."
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.
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.
The fear of a global bear market is partly the product of the global boom of recent years, which deepened trade and financial links. Exports from Asian countries excluding Japan have grown 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.
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.
The current market looks a lot like the beginning of past bear markets, such as the ones that began in 2000 and in the 1970s and 1987, 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, technology stocks, and foreign stocks. Finally even stocks of strong companies are affected.
What happens, Mr. Desmond says, is that 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.
Not everyone shares that pessimism, of course. Some 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.
--Alistair MacDonald in London, Laura Santini in Hong Kong, and Anita Raghavan in New York contributed to this article. |
