Declines stir talk of bear market
The stock market’s gloomy start to the new year worsened Tuesday as share prices plunged on more worries about the financial system and the economy.
With most major stock indexes now down more than 10% from their 2007 highs -- the sharpest such “correction” in at least five years -- some veteran analysts are raising the specter of a full-on bear market.
“It has all the earmarks, all the attributes, all the qualities of a bear market,” said Hugh Johnson, chief investment officer at Johnson Illington Advisors in Albany, N.Y. “Every day we get more news that’s very demoralizing for investors.”
The Dow Jones industrial average sank 238.42 points, or 1.9%, to 12,589.07, its lowest closing level since April. It was the third time in five sessions that the blue-chip index has fallen more than 200 points.
Stocks rose at the opening but then were dragged down by rumors that mortgage leader Countrywide Financial Corp. might seek bankruptcy protection.
The market rallied again at midday, only to be socked by a warning from telecom giant AT&T; Inc. that the company’s consumer business was softening as more customers were having trouble paying their phone and Internet bills.
AT&T;’s bombshell drove its shares down more than 10% before they recovered about half that loss to finish off $1.87, or 4.6%, at $39.16.
More important, the troubles of AT&T;’s customers intensified concerns that the slumping housing market and high gasoline prices were causing consumers to pull in their horns.
Consumer spending has been surprisingly strong since mid-2007, limiting the ill effects on the economy from the credit crunch sparked by heavy lender losses on high-risk mortgages.
But many Americans can’t readily pull cash out of their homes anymore via home equity loans, making it tougher to pay for luxuries such as high-speed Internet access, analysts say.
There have been other signs in recent weeks that the economy was fast losing steam. Manufacturing activity in December was the weakest since April 2003, according to a report from the Institute for Supply Management.
And the government Friday said the economy created a net 18,000 jobs last month, the slowest pace in four years.
For stock investors, the risk is that a pronounced slowdown in the economy -- or an outright recession -- would slash corporate earnings, which underpin share prices. Historically the market usually has fallen sharply during recessions.
Wall Street suffered a steep decline in August amid the first signs of how serious the rise in mortgage defaults had become.
But the market recovered in September after the Federal Reserve began to cut short-term interest rates.
Stocks fell again in October and November, then resurged modestly early in December.
When the current sell-off began late last month, analysts said one crucial issue would be whether buyers would return at the levels the market had bounced in August and November -- about 12,800 on the Dow and about 1,400 on the broader Standard & Poor’s 500 index.
On Tuesday the indexes blew through those levels. The S&P; 500 dived 25.99 points, or 1.8%, to 1,390.19, its lowest since March.
Falling through the previous lows can sometimes trigger selling unrelated to economic or other fundamental forces.
Some analysts said there were other ominous signs that the market was poised for a deeper decline.
Investors have been giving up on technology stocks, which had been among the market’s best performers last year. Tech has been the single worst sector in the S&P; 500 index this year, falling 10% on average in the first five trading days.
The Nasdaq composite index, dominated by tech issues, slid 58.95 points, or 2.4%, to 2,440.51 on Tuesday, its eighth straight decline. Chip maker Intel slid 62 cents to $22.26, Apple tumbled $6.39 to $171.25 and Google slumped $17.57 to $631.68.
What’s more, the sell-off since the new year began has been broad-based. Eight of the 10 major S&P; 500 industry sectors have fallen.
Extreme weakness in small-company shares also is a worrisome sign, some experts said. The Russell 2,000 small-stock index sank 2.6% on Tuesday to 704.86 and now is down 17.6% from its peak in mid-July.
A drop of 10% to 20% in major stock indexes is generally considered a correction, meaning a short-term pullback in a bull market.
When the decline exceeds 20%, many Wall Street pros view the drop as a new bear market.
The Dow and the S&P; 500 still are in correction territory, off 11.1% and 11.2%, respectively, from the all-time highs reached last year. Nasdaq is down 14.6% from its 2007 high.
But some analysts say it’s more likely than not that the bull market that began in October 2002 has run its course.
“We’re in a major bear market,” said Paul Desmond, president of Lowry Research Corp., a stock research firm in North Palm Beach, Fla. “There are going to be substantial losses from this point. It could be another 20% of your capital.”
But many market bulls contend that the economic fundamentals haven’t deteriorated enough to justify a bear market.
Among Tuesday’s market highlights:
Countrywide, which plunged $2.17 to $5.47, led a broad retreat in financial stocks. Citigroup lost $1.12 to $27.14 and Charles Schwab fell $1.72 to $22.72. Bond insurer MBIA dived $3.64 to $13.98 after Morgan Stanley cut earnings estimates for the firm.
In the telecom sector, Verizon Communications dropped 93 cents to $41.99 and Global Crossing fell $1.19 to $19.60.
On the plus side, some investors sought shares of companies that might be hurt less than others by a recession. That helped boost drug stocks. Merck jumped $1.74 to $59.66, Eli Lilly rose $1.51 to $56.06 and Novartis gained $1.63 to $56.97.
Treasury bond yields fell as investors again bought the securities as a haven. The 10-year T-note yield dipped to 3.78%, down from 3.83% on Monday and the lowest since 2004.
Crude oil prices edged up, with near-term futures adding $1.24 to $96.33 a barrel. But energy stocks were mostly lower.
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tom.petruno@latimes.com
