Is this a cuddly bear or a grizzly? Duration of decline is the critical factor

September 01, 1998|By Jay Hancock | Jay Hancock,SUN STAFF Staff writer William Patalon III contributed to this article.

It growls, craves honey and ravages stock prices with a single paw swipe. But market analysts still aren't sure just what species of bear has come to visit.

Technically, yesterday's stock plunge pulled one major index, the Nasdaq, deep into "bear market" territory -- traditionally defined as a decline of 20 percent or more. The Nasdaq has plunged 25.6 percent from its July peak.

Two others, the Dow Jones industrial average and the Standard & Poor's 500, are down 19.3 percent since July. That's still a whisker from official bear status, but yesterday, analysts were willing to grant honorary claws and brown fur to just about any part of the U.S. stock market you'd care to talk about.

"The average stock, in my opinion, peaked a year ago," Rob Brown, senior market strategist for Baltimore brokerage house Ferris, Baker Watts Inc. said yesterday. "Over the last year, a lot of these boats were slowly springing a leak. And [yesterday], a lot of them sank."

What's more important than pinning a bear tag on the market, analysts said, is how long the decline lasts and the degree of fear it wreaks among investors and consumers.

"Personally, I think a bear market has more to do with duration than depth of decline," said David Orr, an economist with First Union Corp. in Charlotte, N.C. "That's the distinction I would make between a correction and a bear market."

The bear emerged as a symbol of falling stocks in Britain in the early 1700s, soon to be joined by its positive opposite, the bull. Over the years, stock traders arrived at the 20 percent rule of thumb for what had previously been calibrated by gut.

According to Chicago-based Ibbotson Associates, there have been 12 bear markets, with declines in the S&P 500 of 20 percent or more, since 1926, the year the firm began tracking bears and bulls. In addition, Ibbotson has tracked nine other declines of 10 percent or more in that time.

In recent decades, Wall Street has identified relatively cuddly and brief-staying bears -- which have had little effect on the overall economy -- as well as some real grizzlies.

The bear market of 1987, for example, took the S&P 500 down 29.5 percent. It was a breathtaking plunge, coming mostly on a dark Monday in October. Analysts made sober comparisons with the 1929 stock crash, prelude to the Great Depression.

But three months later, the 1987 bear had departed, according to Ibbotson. Despite a huge shrinkage of stock market wealth, the U.S. economy continued to grow after the Federal Reserve lowered interest rates. Corporate profits also continued to grow.

"There was something of a pause in consumer spending" in 1987, said Kenneth Mayland, chief economist for Keycorp in Cleveland. "What the Fed did right away was to come in and shovel a lot of liquidity into the markets, and that short-circuited the stock-market-to-economy impact."

Likewise, a 14.7 percent decline in the S&P 500 in the summer and fall of 1990 found little resonance in the economy at large. Prompted by Iraq's invasion of Kuwait, it was erased when Kuwait was liberated.

The fiercest of bears within many traders' memories arrived early in 1973, when oil prices were shooting up and inflation started to accelerate. It didn't exit until almost two years later, according to Ibbotson, when the S&P 500 stocks had cratered by 43 percent, and it was accompanied by wider economic distress.

That's the kind of stock plunge that some on Wall Street fear has arrived now.

"The stage is set for a major bear market," said Charles Allmon, publisher of the Bethesda-based Growth Stock Outlook newsletter and manager of about $135 million in clients' money. "I don't think anyone born today will see these [high] values again in their lifetimes."

But other analysts see only a healthy correction that brings stock values back into line with slower corporate profit growth, not the start of a further plunge.

"I think this is very healthy for capitalism in the United States," Orr said. "The concept of risk, of acquiring losses, had just about left the U.S. financial mind-set. We'll be glad that this happened now instead of having it happen three years from now."

For his part, Brown thinks yesterday's plunge of large, "blue chip" stocks merely places the official "bear" stamp on what had been a weakling market for many months. While stocks in the Dow and the S&P 500 had been robust as recently as July, smaller companies have been hammered since last year, he said.

"Are we in a bear market?" he said. "I think most people felt like they were in a bear market for the past year. If you owned the Dow, you really didn't feel it until today."

Pub Date: 9/01/98

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