Key U.S. stock indexes now in bear markets

RIP, bull market?

Unless stocks reverse quickly, Wall Street statisticians will mark April 29 of this year as the end date of the bull market that was born in March 2009, in the depths of the last recession.

As faith in the economic recovery has evaporated, a number of broad market indexes now have fallen more than 20% from their multiyear highs reached on April 29. A drop of more than 20% is the usual threshold for a decline to be considered a new bear market, unless the sell-off is short-lived.

The New York Stock Exchange composite index, which plunged 7.1% in Monday’s market meltdown, now is off 20.5% from its spring high.

Indexes of small- and mid-size company shares are much deeper into bear-market territory after Monday’s losses. Because those stocks are much less liquid than blue chips, they often collapse quickly in horrendous sell-offs as buyers disappear.

The Russell 2,000 small-stock index sank 8.9% for the day and is down 24.8% from its spring peak.

The Standard & Poor’s mid-cap 400 index has fallen 23.6% from its spring high after losing 8.2% on Monday.

The three best-known market indexes aren’t in bear territory yet, but may get there, or close, on Tuesday unless a massive wave of bargain-hunting hits the market.

The S&P 500 index, down 6.7% on Monday, has lost 17.9% since April 29. The Nasdaq composite is off 18% from its spring high after Monday’s 6.9% slump.

The Dow Jones industrial average is holding up best of any major index: The venerable Dow is down 15.6% since April after falling 5.6% on Monday.

Bear markets typically have shorter lifespans than bull markets, because it’s easier for stocks to fall than to rise. (Think: gravity.)

But the last bear was a drawn-out affair: Major indexes peaked in summer or fall of 2007 and took at least 17 months to bottom in March 2009.

If the stock market’s slide is foretelling another recession, share prices most likely would begin to rebound before the recession ends.

But the market has to sense a catalyst for an economic recovery. At the moment, whether the economy is in a new recession or just growing anemically, a catalyst for faster growth is hard to identify -- which is why sellers are a lot more desperate to get out than buyers are to get in.

-- Tom Petruno

Photo:  A bear sculpture that used to reside outside former California Gov. Arnold Schwarzenegger's office. Credit: Rich Pedroncelli / Associated Press

Volatility index surges in the troubled stock market

 

Volatility is back in the stock market with a vengeance.

By one closely watched measure, volatility expectations jumped a whopping 50% Monday as stocks were pounded mercilessly for the second time in the last three trading days.

As the Dow Jones industrial average sank nearly 635 points, the VIX index, also known as the fear gauge, jumped to its highest level since early 2009.

The index (charted below) gauges investors' expectations of short-term market volatility based on their trading of S&P 500 index "put" and "call" options, which can be used to hedge against market swings.

The gauge typically spikes during turbulent periods when stocks are getting pummeled.

Other than a brief rise in March after the Japanese earthquake, volatility had been relatively subdued this year. It began climbing about two weeks ago and took a big jump Thursday before its even larger leap Monday.

Some traders consider the VIX a useful contrarian indicator that can signal a coming turn in the market.

When petrified investors dump stocks en masse, they set the stage for a rally in which savvy investors can pick up bargains.

For example, the mid-March peak in the VIX following the Japanese earthquake coincided with a trough in the Standard & Poor’s 500 index.

But a surge in the VIX isn’t always a good time to jump in.

The fear gauge hit an all-time peak during the global financial crisis in November 2008. But buying stocks then would have led to more losses. The market didn’t bottom out until the following March.

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Photo credit: Reuters

Asian stocks hit hard in early trading

Stocks in Tokyo were battered in early trading Tuesday, joining the rout in New York and other global markets.

An hour after opening, the Nikkei 225 stock average was down nearly 4%, in what appears to continued panicked selling after Standard & Poor's downgraded the United States' credit rating Friday.

The dive brought the index close to its lowest level of the year, which was set March 15 after the country's devastating earthquake and tsunami.

Other Asian markets also fared poorly in morning activity. South Korea's Kospi continued its free fall by plunging as much as 5%, triggering a brief halt to trading for the second day in a row.

South Korean Finance Minister Bahk Jae-wan called for a global response at a policy meeting Tuesday morning, the Wall Street Journal reported.

"No individual country can adequately respond to this financial market shock on its own," Bahk said. "Given our nature as a small and open economy, we need to strengthen policy collaboration with other countries."

Australia's S&P/ASX200 was down 5.4% in early trading.

-- David Pierson

Photo: Foreign currency dealers talk at the Korea Exchange Bank in Seoul on Monday. Credit: Truth Leem / Reuters

Volatility surges in the troubled stock market

 

Volatility is back in the stock market with a vengeance.

By one closely watched measure, volatility jumped a whopping 50% Monday as stocks were pounded mercilessly for the second time in the last three trading days.

As the Dow Jones industrial average sank nearly 635 points, the VIX index, also known as the fear gauge, jumped to its highest level since early 2009.

The index gauges investors' expectations of market volatility based on their trading of S&P 500 index "put" and "call" options, which can be used to hedge against market swings.

The gauge typically spikes during turbulent periods when stocks are getting pummeled.

Other than a brief rise in March after the Japanese earthquake, volatility had been relatively subdued this year. It began climbing about two weeks ago and took a big jump Thursday before its even larger leap Monday.

Some traders consider the VIX a useful contrarian indicator that can signal a coming turn in the market.

When petrified investors dump stocks en masse, they set the stage for a rally in which savvy investors can pick up bargains.

For example, the mid-March peak in the VIX following the Japanese earthquake coincided with a trough in the Standard & Poor’s 500 index.

But a surge in the VIX isn’t always a good time to jump in.

The fear gauge hit an all-time peak during the global financial crisis in November 2008. But buying stocks then would have led to more losses. The market didn’t bottom out until the following March.

RELATED:

Dow tumbles 634 points on recession fears

Treasury bond yields plunge as panicked buyers ignore downgrade

Oil reaches a 2011 low; gasoline prices should fall

-- Walter Hamilton

Photo credit: Reuters

For housing market, economic worries trump downgrades

Concern over the future of the U.S. economy -- not ratings-firm downgrades of the U.S. or mortgage finance titans Fannie Mae and Freddie Mac -- remains the biggest threat to the nation’s housing market, experts said.

With investors dumping shares of U.S. stocks on Monday, yields on U.S. Treasuries continued to decline, as buyers poured into what is traditionally considered a financial safe haven. Because of that flight to Treasuries, mortgage rates, which are tied to Treasuries' yields, are likely to stay near their historic lows in the near term, Guy Cecala, publisher of Inside Mortgage Finance Publications, said Monday.

“The stock market continues to be in the toilet,” Cecala said. “Investors don’t really have the choice to abandon Fannie and Freddie debt or Treasuries, so actual rates are going down.”

On Friday, credit ratings firm Standard & Poor’s downgraded U.S. debt from AAA to AA+, a move that ignited the broad sell-off Monday. S&P also downgraded mortgage titans Fannie and Freddie, saying those companies -- which were placed under conservatorship by the U.S. government in 2008 -- have debt that is exposed to economic volatility and any further downgrade of long-term U.S. debt.

Under more normal markets conditions, those moves would probably lead to a spike in mortgage rates, said Cecala of Inside Mortgage Finance. Freddie Mac, in a filing with the Securities and Exchange Commission on Monday, warned that a downgrade of its credit rating could lead to an upending of the mortgage market.

“Such actions could lead to major disruptions in the mortgage market and to our business due to lower liquidity, higher borrowing costs, lower asset values and higher credit losses," the company said, in its quarterly filing.

Reporting a loss for the spring, the company requested $1.5 billion in additional aid from the government.

But Michael D. Larson, a housing and interest rate analyst with Weiss Research, said that the weak economy remained the overriding factor for the housing market's sluggishness. The plunge in stock markets and talk of a double-dip recession have added to continued concerns over the direction of the economy, which will serve as a drag on the housing market, he said.

“This is not a rate-driven issue,” he said. “We have low rates, but we don’t have confidence, we don’t have jobs.”

There is some evidence consumers are taking advantage of falling rates for fear they will eventually rise. The online mortgage referral company LendingTree said Monday that it experienced one of its biggest days ever in applications for home loans over the weekend -- with many of those being applications for refinancing.

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Twitter: @AlejandroLazo

Photo: Freddie Mac's corporate offices in McLean, Va. Credit: Pablo Martinez Monsivais / Associated Press

What Will Stop the Drop?

What will stop this?

Let’s look at some of the things that have not worked.

The Group of 7 finance ministers promised to act together in a cooperative way.

President Obama assured us that he wanted to cooperate with Republicans.

FLOYD NORRIS

Notions on high and low finance.

It would be wonderful — and most likely would lead to a rebound — if there were evidence that genuine cooperation was going to arrive, and that governments would act together to try to both fix the financial systems and avoid new downturns. But so far there is no indication that any such thing will happen.

Notions on high and low finance.

If that cannot be, some bold leadership from someone — preferably someone with the ability to borrow lots of money — would be welcome. But the president seems unwilling to do anything but issue pleas that fall on deaf ears. Chancellor Angela Merkel has grudgingly moved but is unwilling or unable to try to persuade Germany that it must step up far more than it has.

Picking one cause for the recent slide is not easy. But in retrospect one should not rule out the European bank stress tests, whose results came out on July 20. This time, we were promised, the tests would be credible. But when they arrived, we learned that Europe was still assuming that European sovereign debts were risk-free. The collapse started soon after that.

I am in no position to crow — I was more optimistic about the economy than most were last year, and I was wrong. But it now appears clear that the financial crisis never really ended. The amount of capital wasted in the boom years continues to drag economies down. But there is no real discussion of how to deal with that.

An important lesson that leaders grasped in 2008 and 2009 was that free enterprise was not going to work without a decently functioning financial system. It is a lesson that may need to be learned again.

It was just six months ago today that American financial stocks hit their recent highs. Since then, the collapse has not spared any bank. But the ones hit particularly hard have had some combination of the following:

1. Leftover liabilities from the bad old days of lending without much regard for credit quality, secure in the knowledge that loans could be sold to someone else before they went bad.
2. A lot of European sovereign debt.
3. Doubts about the level, or accuracy, of the bank’s capitalization.
4. Particularly for some regional banks in the United States, commercial real estate loans that should never have been made.

The KBW bank indexes for the United States and Europe contain 24 stocks each. More than a third of them have lost more than a third of their value in six months.

They are:

1. Bank of America, U.S., down 55.4%
2. Commerzbank, Germany, down 55.3%
3. Lloyds Banking, Britain, down 49.5%
4. Société Générale, France, down 45.4%
5. National Bank of Greece, Greece, down 45.2%
6. Regions Financial, U.S., down 43.5%
7. Barclays, Britain, down 43.3%
8. Citigroup, U.S., down 42.8%
9. Suntrust, U.S., down 42.6%.
10. Intesa Sanpaolo, Italy, down 42.2%
11. Crédit Agricole, France, down 40.6%
12. New York Community Bancorp, U.S., down 39.0%
13. Unicredit, Italy, down 38.7%
14. Royal Bank of Scotland, Britain, down 37.8%
15. Bank of New York Mellon, U.S., down 36.1%
16. Fifth Third, U.S., down 35.1%
17. Credit Suisse, Switzerland, down 33.6%.

Figures are based on dollar prices, rather than local currency quotes, and were calculated by Bloomberg.

Treasury bond yields plunge as panicked buyers ignore downgrade

U.S. Treasury bond yields dived in Monday’s global market panic as investors rushed to buy, in effect thumbing their noses at Standard & Poor’s downgrade of the government’s debt rating.

In a time of extreme turmoil in markets, investors still are trusting that Treasuries will offer relative safety.

“People look around the world and they don’t know where else to go,” said Charles Comiskey, head of Treasury bond trading at Scotia Capital in New York.

The 10-year T-note yield sank to 2.32%, down from 2.56% on Friday and the lowest since early 2009.

Shorter-term yields also tumbled. The three-year T-note yield slid to 0.42% from 0.49% on Friday.

In a bit of irony, the Treasury saw relatively poor demand at its weekly auction of three- and six-month bills. Analysts said that reflected big investors' desire to lock in longer-term yields.

Over the weekend, many investors had been expecting Treasury bond yields to rise initially because of the rating downgrade, and planned to buy as rates went up, Comiskey said.

But as is often the case in markets, the crowd doesn’t get what it wants.

It also helped the Treasury market, of course, that stock prices collapsed worldwide Monday, putting a huge amount of cash in equity sellers’ hands. They had to invest it somewhere fast.

The Dow Jones industrial average closed down 634.76 points, or 5.6%, at 10,809.85, the lowest since October.

Buyers also flocked to German and Canadian government bonds, among others, as foreign stock markets crumbled. The German DAX stock index sank 5%. Canada’s main share index slid 4%.

Next up for the Treasury market: The Federal Reserve’s meeting Tuesday. The betting is that the Fed isn’t yet ready to announce a new bond-buying program to pump money into the financial system, but that could change if stock markets are in another freefall Tuesday.

The Treasury also will be selling $72 billion in new debt over the next three days: $32 billion in three-year notes Tuesday,  $24 billion in 10-year notes Wednesday and $16 billion in 30-year bonds Thursday.

Those auctions will show whether foreign investors, in particular, still want Treasuries at these low yields.

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-- Tom Petruno

Photo: The Treasury building in Washington. Credit: Andrew Harrer / Bloomberg News