How This Meltdown Stacks Up


Some key stock indexes may not yet officially show it, but make no mistake: U.S. stocks are caught in a bear market, and the only remaining question is how severe the damage will become, experts say.

The main blue-chip indexes--the Dow Jones industrial average and the Standard & Poor's 500 index--both are down 19.3% from their July 17 peaks. That is just short of the 20% decline commonly viewed as the bear-market threshold.

But after a ferocious plunge Monday that tore nearly 513 points, or 6.4%, from the Dow, Wall Street already is comparing this downturn with previous bear markets in the search for clues as to when it may end.

"Technically, is it a bear market?" asked James Stack, editor of the InvesTech Market letter in Whitefish, Mont. "It doesn't matter when your portfolio isn't in blue chips. You're already suffering bear-market conditions."

Indeed, the Russell 2,000 index of smaller stocks now has plunged a stunning 31.2% from its April peak.

But even as they assessed the damage Monday, some analysts said the market could be poised for at least a short-term snap-back.

"Very shortly, you're going to exhaust this wave of selling and get a pretty good rally," said John Hughes, a technical analyst at Shields & Co. in New York. "This selling smacks of a real panic, get-me-out-at-all-costs type of deal."

But where the ultimate bottom may be in this decline is anyone's guess. If history has shown anything, it's that no two bear markets are exactly alike.

In some ways, the current slide is almost identical to many earlier bear markets: It began with stocks being richly priced; smaller stocks began to weaken first, as investors flocked to "Nifty Fifty" large-cap issues; and it was heralded by rampant speculation in a particularly hot sector--in this case, unproven Internet-related stocks.

Nevertheless, this market decline is distinct both in the forces behind the sell-off as well as the relative speed with which it is occurring, experts say.

Unlike previous bear declines, the current slide hasn't been triggered by the usual forces of rising inflation and rising interest rates and an overheating U.S. economy, but rather by deepening world financial problems and the specter of deflation.

Some experts believe that's a positive: If the global financial turmoil can subside soon, then stocks might be buoyed by the fact that U.S. interest rates have been falling rather than rising. If a recession appears unlikely, then investors also may become more optimistic about U.S. corporate earnings growth, which has slowed this year but hasn't collapsed.

"An equity market decline associated with a recession and a big profit [contraction] very often is very difficult to reverse," said Christine Callies, chief strategist at Credit Suisse First Boston Corp.

What's more, it's widely believed that the Federal Reserve Board will cut interest rates significantly if recession worries deepen.

But some analysts worry that precisely because this decline has been fueled by events in foreign markets and economies, it isn't clear that the Fed could stave off a global recession with lower U.S. rates.

"There's no policymaker in a position to do anything about this," said Hugh Johnson, chief investment officer at First Albany Corp. "The problem is that this is not strictly a U.S. issue, and that's what bothers me. It's a global issue."


The speed of the current correction is also noteworthy. The almost 20% slide in blue chips in slightly more than six weeks has come much faster than many other downturns.

The bear markets of 1973-74, when the S&P; 500 fell 48.2%, and 1980-82, when it tumbled 27.1%, both lasted 21 months.

Though it's inflicting painful losses, the accelerating market decline of the last week has raised hope that this bear market will end relatively quickly. A more prolonged decline, some experts believe, could do much greater long-term damage to the market because it could devastate investors' psyches.

How can we know how much further stocks will fall?

From a fundamental viewpoint, analysts note that many stocks still sell for relatively high price-to-earnings ratios, at least historically. Just how cheap stocks will have to get may depend largely on how worried investors become about the 1999 economic outlook.

"I think it's bad because the market is coming off record valuations and [thus] you could have record declines" from those levels, said Ricky Harrington, a technical analyst at Interstate/Johnson Lane, a brokerage in Charlotte, N.C.

From a "technical" standpoint, meanwhile, many analysts are waiting for a so-called capitulation day in which selling becomes so frenzied that investors in effect tire themselves out.

That typically marks at least a temporary rebound. In the market's often contrarian ways, extreme bearishness is considered to be positive for the market.

Capitulation is thought to be a good sign because, as some investors dump stocks at any cost, others take advantage of the scattershot selling by picking them up on weakness.

Some analysts believe that the wild selling in big-name stocks Monday may mark the beginning of the capitulation phase.

"Selling like this does not occur during the beginning of a correction," said Barry Hyman, senior market analyst at Ehrenkrantz King Nussbaum Inc. in New York. "This is the give-up, or capitulation, phase of the decline. It normally occurs near the end of a phase of the sell-off."

The market's intraday trading patterns may yield the best clue as to when the market will recover, analysts say. If the market were to open up strong this morning, or any other morning following a big loss, that would be negative for stocks, many experts believe.

Ironically, that would show that investors are not yet fearful enough. As happened Monday when the Dow started the day with a small gain, selling probably would pick up in the afternoon.

"Being up in the morning and down in the afternoon is an indication that no one is willing to go home" still holding stocks, Hughes said.


The current slide, while speedy so far compared with many other bear markets, has been slow compared with the market crash in October 1987, in which the Dow plunged a stunning 22.6% in a single day. Though that bear market officially lasted three months, the worst damage happened in the Black Monday (Oct. 19) session.

The current market slide also has lacked many interim rallies--an uncommon occurrence, Stack said. The Dow has managed only three days of gains of more than 100 points since the pullback began in mid-July.

That's a sign, he said, of the fury with which investors are heading for the exits. He also believes that many investors waited to unload stocks during what they assumed would be a fairly strong rally in the early days of this pullback.

When those rallies didn't materialize, investors were saddled with even bigger losses and will be all the more intent on selling in coming weeks, Stack predicts.

Stack, who has been bearish for several years, believes the Dow might eventually plunge into a market crash reminiscent of 1929 and 1987. His reasoning? After sliding 13% from its peak in 1929, the Dow crashed three days later.

In 1987, the Dow crashed two days after breaching the 13%-loss threshold.

This time around, the Dow's loss from its peak exceeded 13% last Friday.

"We're right at the threshold where we'll find out if a crash scenario is possible," Stack said.

Many other analysts dismiss the crash talk. "This is certainly not a 1929 event," Hyman said. "Any serious weakness from here is an opportunity to buy some good blue-chip stocks you couldn't get three months ago. The world is not going to collapse."


Tech's Stars Lead the Plunge

Monday's sell-off was led by plunges in the major technology stocks that have helped power the 1990s bull market--names like Microsoft, Dell Computer and Cisco Systems. Their declines in recent sessions have slashed the Nasdaq 100 index, which tracks Nasdaq's biggest stocks. Monthly closes and latest for the index:

Nasdaq 100 index

Monday: 1,140.34, down 124.70

By Many Yardsticks, the Bear Is Here

A bear market usually is defined as a drop of 20% or more in major stock indexes. How key indexes fell Monday, and their declines from their peaks:

(Decline from peak).

Dow industrials: -6.4% (Monday drop); -19.3% (Decline from peak)

S&P; 500: -6.8% (Monday drop); -19.3% (Decline from peak)

NYSE composite: -6.2% (Monday drop); -20.0% (Decline from peak)

Wilshire 5,000: -6.7% (Monday drop); -20.9% (Decline from peak)

Nasdaq 100: -9.9% (Monday drop); -22.2% (Decline from peak)

Nasdaq composite: -8.6% (Monday drop); -25.6% (Decline from peak)

Russell 2,000: -5.7% (Monday drop); -31.2% (Decline from peak)

Blue-Chip Carnage

Some of the market's most "liquid" stocks suffered huge declines Monday, as sellers were forced to keep marking prices down to attract buyers. A sampling:


52-week Mon. close Mon. pct. Decline from Stock high and change change 52-week high Dell Computer $129.38 $100.00, -$18.75 -15.8% -22.7% America Online 140.50 81.94, -14.31 -14.9 -41.7 Coca-Cola 88.94 65.13, -7.63 -10.5 -26.8 Walt Disney 42.75 27.44, -3.19 -10.4 -35.8 AT&T; 68.50 50.13, -5.69 -10.2 -26.8 Wal-Mart 69.81 59.00, -6.38 -9.8 -15.5 Merck 139.13 115.94, -11.44 -9.0 -16.7 Microsoft 119.63 95.94, -9.31 -8.8 -19.8 IBM 138.13 112.63, -9.94 -8.1 -18.5 GE 96.88 80.00, -5.88 -6.8 -17.4


Bear Markets Since 1929

Bear markets have differed widely in duration and the extent of the average decline in stock prices. Here are the bear markets that have occurred since 1929, including all declines of roughly 20% or more in the blue-chip Standard & Poor's 500 index. Also shown: The number of years the market needed to recover its losses after hitting bottom.


Duration S&P; Years to Bear market (months) decline breakeven Sept. 1929-June 1932 33 -86.7% 25.2 July 1933-March 1935 20 -33.9% 2.3 March 1937-March 1938 12 -54.5% 8.8 Nov. 1938-April 1942 41 -45.8% 6.4 May 1946-March 1948 22 -28.1% 4.1 Aug. 1956-Oct. 1957 14 -21.6% 2.1 Dec. 1961-June 1962 6 -28.0% 1.8 Feb. 1966-Oct. 1966 8 -22.2% 1.4 Nov. 1968-May 1970 18 -36.1% 3.3 Jan. 1973-Oct. 1974 21 -48.2% 7.6 Nov. 1980-Aug. 1982 21 -27.1% 2.1 Aug. 1987-Dec. 1987 4 -33.5% 1.9 July 1990--Oct. 1990 3 -19.9% 0.6 July 1998-present 1 (so far) -19.3% ??


Source: Society of Asset Allocators and Fund Timers

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