Monday, August 09, 2004

Wall Street frets that the US may be entering another bear market, less than two years since the end of the last one.
The slump in key stock indexes last week, before and after the shockingly weak July employment report issued Friday morning, deepened this year's decline on Wall Street and raised fears that a new bear market could be underway � less than two years since the last one ended.

The technology-heavy Nasdaq composite index plunged nearly 6% last week and is down 17.5% from its January peak. By one rule of thumb, a decline of 20% or more signifies a bear market.

The losses in other major indexes have been less severe. Still, stocks have reached a "tender point," said Tom McManus, investment strategist at Banc of America Securities in New York. Many investors, he said, are weighing whether this still is a bull market, or whether stock prices are headed for a more serious setback. . . .

The average blue-chip stock is priced at about 15 times estimated 2005 earnings per share, said Kevin Caron, market strategist at Ryan, Beck & Co. in Florham Park, N.J.

The market has been much cheaper than this at various times in the last half-century. Yet with the plunge in Treasury bond yields last week on economic concerns, and the potential for the Federal Reserve (which meets on Tuesday) to slow its pace of boosting short-term interest rates, stock valuations are compelling when viewed alongside the alternatives of bonds and "cash" accounts such as money market funds, Caron said.

"I'm getting itchy to buy stuff here," he said of the stock market.
As of Friday, the Dow is down 8.6% and the S&P 500 is down 8.1% from their February 11 high closes. The volatile NASDAQ is down 17.5% from January 26.

What may keep the stock market from heading into official bearish territory (-20%) is not that there is anything compelling about investing in US stocks, but that every other US investment opportunity is so poor that stocks look good in comparison. That's a recipe for either another stock market bubble, or the more likely path, divestment from US stocks into foreign equities (or at worst, cash holdings in foreign currencies). Foreigners don't buy many US stocks any more (they're pretty much sticking to government bonds nowadays), but even a moderate outflow of capital from the US due to a weak stock market could significantly inflate the US current account deficit even further and finally turn US net investment income negative. That would set us up nicely for a debt trap scenario.

Sure it's several steps away, but exposing the contradictions of capitalism is what the Globblog is all about.


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