Bear market one of modern history’s worst

CHICAGO

The bear market that is ravaging investor portfolios is now one of the worst in modern U.S. history and has wiped out more than $7 trillion in shareholder value, with no bottom clearly in sight.

When it stops and how far it drops, no one can predict with any accuracy - a painful uncertainty underscored by Wall Street’s giddy mood at the moment the steep descent began.

A year ago Thursday, Wall Street was celebrating the fifth anniversary of a bull market that had created $10 trillion in shareholder wealth since 2002. The Dow Jones Industrial Average and the Standard & Poor’s 500 Index hit record highs on Oct. 9, 2007.

A headline in USA Today captured the prevailing sentiment: “Market’s run could keep going for a while.”

In fact, the party was over. The subprime mortgage problem that was laid bare by a decline in home values developed into a much broader credit crisis that toppled giant banks and financial institutions.

Panicked investors have been fleeing from stocks. The Dow Jones Industrial Average fell 678.91 Thursday, or 7.33 percent, to 8,579.19. The Standard & Poor’s 500 Index fell 75.02, or 7.62 percent, to 909.92. The Nasdaq Composite Index fell 95.21, or 5.47 percent, to 1,645.12.

Most experts don’t see a recovery until there’s greater stability in the housing market, banks are lending freely and employment improves.

Unlike other periods that saw precipitous drops, this one is rooted in foundering credit markets. That makes predictions more difficult than if the plunge were based on company profits or stocks alone.

“When you have an environment like this where the crisis is so deeply rooted from the credit standpoint, it adds an extra layer of ambiguity and ultimately of uncertainty,” said Mark Freeman, portfolio manager for Westwood Holdings Group Inc. “That is what the markets are struggling with.”

No turnaround is seen before 2009 or later. And there is a wide divergence of opinion on the future of this bear market, which feels unlike any other because of the $700 billion federal bailout and the collapse of investment banks.

Even with the Federal Reserve and other major central banks around the world slashing interest rates Wednesday, experts were hesitant to call a bottom.

“Technical indicators tell us that we’re overdue for at least a short-term bounce,” said Liz Ann Sonders, chief investment strategist for San Francisco-based brokerage Charles Schwab Corp. “That doesn’t tell us that the bear market is necessarily over.”

This bear market - a term often defined as a prolonged drop in stock prices of 20 percent or more - already is harsher than most of the 10 bear markets since the 1930s. Those markets have lasted an average of about 16 months from peak to trough, with average stock losses of 31 percent, based on S&P data.

Since the record 83 percent plunge from 1929 to 1932, the current market is exceeded only by the drops of 49 percent from 2000 to 2002 during the tech stock implosion and 48 percent from 1973 to 1974 during a recession and energy crisis.

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