Grumblings of a Bear Market

Low S&P, Dow, and Nasdaq levels can point to several looming factors. Not even supportive comments from the Fed's Bernanke can ease the pressure

by Ben Steverman

Like a fatigued swimmer flailing for shore, investors are just hoping to find the bottom. The Standard & Poor's 500-stock index has declined nearly 6% over the past three trading sessions, while the Dow Jones industrials are off 5% and the Nasdaq just over 5%. The Dow, down more than 8% for 2008, is at its lowest level since March, 2007, while the S&P 500, off 9% for the year, has hit a 15-month low.

Each day brings a bevy of bad news that is drawing increasing numbers of investors to the conclusion that a bear market and U.S. recession are perilously close, with the big banks at risk of further massive writedowns. "There's certainly a strong possibility of a bear market and recession," says John Merrill of Tanglewood Capital Management.

The market could easily be turning from a garden-variety correction to a bear market, where downward momentum feeds on itself, he says. For every five stocks moving higher Thursday on the New York Stock Exchange, 27 lost value. On the Nasdaq, the ratio was 23-to-7 negative. The last bastions of market strength, such as agriculture stocks, are "starting to crack," says Gary Wolfer of Univest Wealth Management. The fertilizers and agricultural chemicals industry plummeted 10.6% on Jan. 17.

Fear Factors

Pushing stocks and the economy ever lower are a potent mix of factors:

• Eye-popping credit losses at huge financial institutions including Merrill Lynch (MER) and Citigroup (C), with a credible threat of more pain to come in April when results from the current quarter are released.

• Expectations that corporate profits will register their worst quarter in years.

• A steady stream of unattractive economic data, including the Jan. 17 Philly Fed index, a reflection of a survey of mid-Atlantic region manufacturers. That reading—20.9 in January—prompted Ken Kim of Stone & McCarthy Research Associates to say "the U.S. factory sector is collapsing right before our very eyes."

A Rebound Within Sight?

Before the opening bell Jan. 17, the threat to big banks became even more of a reality when Moody's Investors Service (MCO) said it would review bond insurer Ambac Financial Group's (ABK) Aaa credit rating. Ambac is projecting substantial losses given the insurance policies it wrote on hundreds of billions of dollars in mortgage-backed bonds, and a downgrade from Aaa would likely spark further significant writedowns among banks.

Ambac called the announcement "surprising" and said it was assessing the review and the impact on its plans. Ambac plunged 52% to $6.24, and set a new 52-week low in the session of $4.50. The stock is down from a high in May of $96.10. Rival MBIA (MBI) fell 31% to finish at $9.22, also a 52-week low.

Chris Burba, a technical analyst with S&P, predicted that stocks may rebound "sometime soon" as investors look to swoop in on bargain prices. But such a bounce hardly signifies a recovery for stocks, according to S&P, which like BusinessWeek is a unit of The McGraw-Hill Companies (MHP). "Any multiday or near-term upturn should be considered as an opportunity to liquidate any long-term bullish positions and initiate bearish positions in securities that pace the broader market," Burba wrote.

Mounting Pressures

The selling pressure has also not been abated by recent supportive comments from Fed Chairman Ben Bernanke about the various economic stimulus proposals floating around Washington. Bernanke went to Congress on Thursday and urged speedy action on such a package, likely to total around $100 billion.

Yet while most observers expect a half-percentage point cut in the Fed funds rate later this month, to 3.75%, many fear that such moves represent a fix that is both too meager and tardy. "U.S. equities remain pressured as recession fears remain, and at this point, the market needs to see something more than reassuring Fed comments in order to rally," says Marc Chandler, an analyst with Brown Brothers Harriman. There is a "growing sense that recession is on the way," adds Aaron Smith of Moody's Economy.com.

Steverman is a reporter for BusinessWeek's Investing channel.