The Bear Is Everywhere

09/29/2011 10:15 am EST


Howard Gold

Founder & President, GoldenEgg Investing

While there’s been a lively debate among traders and investors as to whether the US is in a “real” bear market, or just a correction, most of the rest of the world is already there, and it’s only a matter of time before the question is settled, writes editor-at-large Howard R. Gold.

The S&P 500 index fell 17.8% from its April 29 peak to its recent low on August 10. That’s pretty close to the 20% decline commonly associated with a bear market.

It sounds like semantics, but it matters. Corrections, like the 16% we saw last year from April 23 to July 2, are followed by rallies that can take the market to new highs rather quickly. Bear markets, like the ones we had in 2002 and 2007, are deeper and much more prolonged.

So, here’s the bad news: The S&P may not be there technically yet, but many market sectors are. And huge swaths of overseas markets are deep in bear market territory.

As of Friday, the MSCI EAFE index was off 26% from its May 2 close (in dollar terms). But MSCI’s European index had lost 30% of its value, and the MSCI World ex-US index was down 26%.

Emerging markets stocks have been decimated. The MSCI Asia index has lost 27%, Latin America has given up 28%, and emerging Europe is off a whopping 37.7%. That’s a real bear market.

And some former high flyers have gotten their comeuppance: Russia and China are both down more than 28%, while Brazil has plummeted around 31% in dollar terms.

When measured in local currency terms, things look a little better for some countries like Brazil, India, Australia, and Sweden. But it doesn’t change the big picture. With some exceptions, there appears to be a bear market everywhere.

Biggest Bear Markets in 2011 (in local currencies)
(April 20–May 2nd through September 23rd)
Country % Decline
Greece -49.9%
Hungary -43.4%
Italy -38.5%
Austria -37.8%
Finland -34.2%
Germany -32.1%
France -30.6%
China -28.9%
Poland & Russia -28.2%
Denmark -27.5%
Source: MSCI

Nicholas Vardy, who writes the Global Guru newsletter and runs some trading services from London, points out that the S&P 500 has stayed above the lows it hit on August 10, around 1,120, and even bounced off it eight times since then.

But the broader MSCI EAFE index fell through support levels early in September, and the MSCI emerging markets index broke down last week. “Emerging markets are down 18% in September, a bear market on the basis of three weeks,” he told me.

The problem, of course, is Europe, which Vardy called “a disaster”—even Germany, which until recently had held up better than many others on the Old Continent.

“Their market is getting hit more than almost anybody else” on fears of a global economic slowdown and concerns that Germany may have to bear the brunt of a Eurozone bailout, he said.

Global stocks have been rallying in the last few days, on hopes the European Union will be able to put a package together to save Greece and other debtor countries like Portugal, Spain, and Italy.

Don’t count on it, said Doug Ramsey, director of research at The Leuthold Group in Minneapolis. Germany’s Bundestag votes Thursday on a months-old plan to increase the Eurozone’s emergency stabilization fund to 440 billion euros ($600 billion), but nobody thinks that’s enough to cope with the metastasizing crisis.

Ramsey said a Greek default “could still happen. The reality is unavoidable now. The question is, what is the recovery rate?”

Recurring worries about European debt and the global economy are behind the bear market, which his firm called in early August, when they started selling stocks and reduced their equity exposure to 33%.

But the major US averages have done relatively well, despite the European crisis, a weakening economy, and the toxic political battle that led to Standard & Poor’s downgrading our sovereign debt.

NEXT: Why the US Is Holding Up Better


He said US large caps had avoided a technical bear market because the S&P and the Dow Jones Industrial Average are “heavily weighted in big defensive multinationals.” Staples, utilities, and health care comprise 30% of the S&P, much more than in other developed and emerging markets.

“I have to admit, the Dow and the S&P have been awfully impressive considering what’s going on overseas,” he said, but added, “I clearly think this is a bear market.”

Fighting Off the Bear—So Far (measured in local currencies)
(April 20–May 2nd through September 23rd)
Country % Decline
New Zealand -2.3%
Colombia -3.8%
South Africa -6.7%
Mexico -8.4%
Philippines -11.9%
Malaysia -12.4%
Indonesia -13.6%
India -15.1%
Japan -15.1%
US -16.5%
Countries in bold in bear markets in US dollar terms.
Source: MSCI

The Morgan Stanley cyclical index, for example, has fallen about a third from its peak. The Russell 2000 small-cap index, which hit an all-time high April 29, had lost about 26% of its value by its low last week. So did the bellwether Dow Jones Transportation index from its July 7 all-time high.

Ramsey acknowledged the resilience of the 1,120 support level on the S&P, but he doesn’t expect it to hold. Generally bear markets end in massive capitulation, with different indices hitting new lows at once on a couple of days, and we haven’t seen that yet, he said.

If the S&P were to break down and fall to the 1,022 level at which it bottomed in July 2010, that would be a 25% bear-market decline. A 30% drop—the median bear-market decline—would take the S&P down to 950.

“If we do trade under 1000, I expect sentiment to go apocalyptic,” with safe havens beginning to break down, he told me.
How long will the bear last? “I think it could all be over in the next six weeks,” he said. If he’s right, at least we can see an end to the agony.

But there’s good news, too. At S&P 980, Ramsey said, price/earnings ratios based on some longer-term measures “would get down to the bottom quartile historically.” He would view that as a buying opportunity for those who have any guts or money left.

And pretty soon, the calendar starts turning favorable to investors, too. “Emerging and global markets tend to do very well in [the fourth quarter], and there are relatively few exceptions to it,” said Nick Vardy. “It didn’t happen in 2008 because the world was falling apart—that was the exception.”

But if you don’t think the world is falling apart, there may be opportunities, he said. Emerging markets are “probably as oversold as they have been since the 2008 crisis,” and together with the seasonal factors, “I think there’s a reason to think these markets may do well,” he said.

Vardy acknowledged we could be in a strong countertrend rally, which Ramsey said could be “of some significance given the amount of pessimism that’s built up.”

Ultimately, Ramsey is looking for it to go much lower, followed by a seasonal rebound starting in November led by small caps, cyclicals, and other volatile stocks, like those from emerging markets.

I’ve been cautious since mid-April, and turned outright bearish in May. I recommended taking some profits and subsequently followed my own advice.

If you’re still too exposed to stocks for your own comfort, I’d lighten up again if the S&P moves into the 1,200s. And I’m watching that 1,120 level on the S&P carefully to see if it holds.

If Ramsey’s right, we’ll have another good buying opportunity soon. “It’s been a memorable bear market,” he said.

Well, thanks for the memories, but most of us would rather forget.

Howard R. Gold is editor at large at and a columnist for MarketWatch. Follow him on Twitter @howardrgold, read more commentary at, and check out his political blog at

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on MARKETS

Keyword Image
2 Ways to Bet on BDCs
5 hours ago

Business development companies (BDCs) lend money to private companies in the form of fixed and varia...