Can't go into OT analysis of why Blood spill might turn into the flood but..
Experts fear a chilly bear market (courtesy Alex)
By WALTER HAMILTON
Los Angeles Times
Even as the U.S. stock market has turned down in recent months, Wall Street has comforted itself with one stubbornly held belief.
Major market declines, many experts said, occur only when inflation and interest rates are rising.
Since neither of those factors has been present, stocks couldn't descend into a ''bear'' market, they said.
But with share prices worldwide now in a deepening slide, a growing number of experts now think the biggest threat to the nearly 8-year-old U.S. bull market isn't the usual one.
Instead of the twin evils of escalating inflation and higher interest rates, the market could be sunk by the opposite: a recession caused by deflationary forces worsened by faltering foreign economies, plunging commodity prices and a wave of cut-rate imports fueled by currency devaluations.
In this scenario, the economic upheaval buffeting Southeast Asia, Russia and parts of Latin America would slowly infect the United States. Weakening demand for U.S. goods overseas, coupled with slowly eroding domestic consumer confidence, would derail corporate profits. And interest rates would fall as stocks sink.
This would mean an ''ice''-driven bear market -- a radical departure from the ''fire''-driven bear markets of the past, meaning inflationary fire.
Fear of the ice scenario were displayed last week as markets around the world tumbled. Investors sold shares on concern that Russia's morass of economic and currency problems would spread into many more countries.
''Investors in the U.S. are becoming very aware that deflationary pressures in other parts of the globe are starting to show up'' in the U.S., said Hugh Johnson, chief investment officer at First Albany Corp. ''The outlook for the economy and profits is getting darker.''
Not quite a bear market
A bear market is generally defined as a drop of 20 percent or more in major stock indexes such as the Dow Jones industrial average. A ''correction'' in a bull market is considered a fall of roughly 10 percent to 15 percent.
By those definitions, the Dow, now off 13 percent from its July 17 peak, so far is in a correction, not a bear market.
However, unlike the Dow, which is comprised of 30 large and well-known issues, smaller stocks are officially mired in a bear market. The Russell 2,000 small-stock index is off a whopping 25.5 percent from its April 21 high.
Despite the market's travails, many investors cling to the belief that as long as inflation and interest rates remain under control, stocks will suffer no more than a normal correction.
''Usually, extended bear markets are driven by recessions, inflationary fears and rising rates,'' said Robert Bissell, chief investment officer of Wells Capital Management in Los Angeles. ''You look at every one of those elements and they're not here.''
A history of rising rates
Analysts note that rising interest rates have been present either immediately preceding or during most bear markets since World War II.
In 1987, for example, the Federal Reserve began pushing up rates on Sept. 4, about six weeks before the notorious Black Monday sell-off on Oct. 19 of that year.
But others note that while many bear markets have shared common traits, no two bear markets have been caused by identical forces.
There were at least two bear markets in the postwar period in which rates either remained steady or actually went down, said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.
Beginning in December 1961, the Standard & Poor's 500-stock index fell 28 percent in 6 1/2 months, Sohn said. Economic growth was sluggish but interest rates did not rise in that period, he said.
In September 1976, the S&P began a 19.4 percent descent over an 18-month period even though the Federal Reserve cut rates in that period, Sohn said.
External factors play role
Rather than being triggered by interest rates, several bear markets have been fueled by external shocks, Sohn noted. The Arab oil embargo played a major role in the 1973-74 bear market and the Gulf War sparked the 1990 downturn, he said.
''People tend to blame interest rates, but to a certain extent the Federal Reserve has gotten a bum rap,'' Sohn said. ''They were contributing factors but did not actually cause the economic recessions and bear markets. More likely, the direct cause was some outside factor.''
Today, the Asian financial crisis, which dates back to July 1997, is the external event that could provoke another severe downturn in U.S. stocks.
A handful of Wall Street experts have predicted for months that the market had more to fear from deflation than from inflation. They have argued that deteriorating economies abroad would eventually poison the economies of the U.S. and Europe.
Countries across Asia devalued their currencies last year and Russia effectively devalued its currency last week. When that occurs, goods produced in the U.S. or Europe suddenly become much more expensive in those countries. At the same time, Asian or Russian exports become cheaper abroad.
That hurts companies in two ways. First, enfeebled foreign economies can't afford to buy U.S. or European goods. Second, U.S. and European companies may have to drop prices to compete with low-priced goods exported from foreign countries.
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