What a U.S. Bear Market Would Look Like Now

Bear Market
Bear Market

Standard & Poor's first-time downgrade of U.S. debt -- from AAA to AA-plus -- on Friday, coming on top of concern of a possible second recession, have raised the specter of a bear market for stocks. A bear market is usually described as a 20% or greater drop from the most recent peak.

The Dow Jones Industrial Average traded above 12,700 in early May and then again in early and late July. It dropped to 11,300 by the end of Friday's trading, representing a collapse of 11% from that peak. A 20% fall would take the index down further to 10,200. So the DJIA could have another 1,100 points to slip.

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If that happens, it wouldn't be the first time the DJIA has slipped into bear territory in recent history. The index plunged from 1,400 in September of 2008 to 8,450 in early October of the same year. Of course, the slide was caused by the credit crisis, and we're unlikely to see that same severity again.

Banks and Auto Makers Pull Market Downward

But financial shares are what could pull the market lower again this time, as concerns about bank balance sheets and poor earnings drive their shares down. Citigroup's stock (C) is off 25% in the last month, and Bank of America's (BAC) shares have fallen nearly 30%. Another set of stocks which have moved close to bear territory are GM (GM) and Ford (F), which are proxies for the U.S. manufacturing base. GM is down 17% in the last month while Ford is off 22%. Weak auto sales in July -- and concerns that the economic dip could make that situation worse -- have driven car stocks down and could well drive them lower.

Technology stocks have been critical to the rally that moved the market to recent highs. Some of the shares in big tech companies have begun to falter on concerns that large IT customers will cut back on purchases to preserve their margins. Shares of bellwether Cisco (CSCO) have slid 17% in the last month, while Dell (DELL) shares have fallen 15% in just the last three weeks

The U.S. markets may well slide again this week. There are certainly indications that could happen in the next two or three days.The market is closing in on bear territory, and more bad economic news could place it firmly there.

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