It's still not (officially) a bear market, even if it feels like one
If it’s any consolation after two miserable weeks for stocks, the extent of the pullback from the market’s spring highs still is within the parameters of a “correction” within a bull market rather than a new bear market.
But if share prices keep falling at this week’s pace it won’t be long before we’re in the bear’s lair, which classically is defined as a drop of more than 20% from major indexes’ recent highs.
Psychologically, not to mention financially, crossing the 20%-loss threshold could be difficult for many investors. The last bear market, after all, just ended in March 2009. Nobody wants to relive that hell again, let alone so soon.
At Friday’s close of 1,022.58, the Standard & Poor’s 500 index was down 16% from its spring closing high of 1,217.28 reached on April 23. The index is back to where it was on Sept. 8.
This week alone, amid more signs that the U.S. economic recovery is slowing, the S&P slumped 5%. That followed a 3.6% slide the previous week.
Among other major indexes, the Dow Jones industrial average has fared best in the sell-off of the last two months. It’s off 13.6% from its spring high. The Nasdaq composite’s decline now comes to 17.3% and the New York Stock Exchange composite is down 16.7%.
The small-stock Russell 2,000 index came close to breaching the 20% bear-market threshold on Friday, when it dipped as low as 595.39. A late rally lifted the Russell index and the rest of the market. The index closed at 598.97, down 19.3% from its April high.Market corrections are supposed to be good for a bull market’s longevity by scaring out “weak” hands and bringing in “strong” hands at lower prices. If you’re afraid, that’s what you’re supposed to be feeling at this point.
The question is whether enough strong hands will show up soon and keep the major indexes from falling into bear territory.
Compared with their prices of two months ago, many stocks obviously are on sale. But whether they’re cheap depends on what you expect to happen with the economy and corporate earnings the rest of this year and in 2011.
As of Friday, the S&P 500 still was up 51% from its bear-market closing low of 676.53 on March 9, 2009. At its April 23 peak the S&P was up 80% from the 2009 low.