S&P 500 Followed Suit The Dow Into Bear Market Territory

U.S. stocks tumbled on Wednesday, July 09, sending Standard & Poor's 500 Index into its first bear market territory since 2002. The slump was led by financial and technology stocks facing escalating fears about the impact of the slowing economy, the housing market slump and related credit crunch, and rocketing oil prices on company profits. The S&P 500 index joined the Dow Jones index, which last July 2 entered bear territory. The three major indexes, the S&P 500, the Dow, and the Nasdaq, are now in the bear territory.

The S&P 500 index fell to 1,244.68 which was down 20.3% from its Oct. 10, 2007 high of 1,562. The Dow Jones Industrial Average fell to 11,147.44, off 21.3% from its Oct high. The Dow has fallen 21 percent from its October all-time high and closed in a bear market earlier on July 2.

The average decline of the Standard & Poor's 500 index in bear markets dating to 1940 is 34.1%. There are three worst bears since 1940 shows how bad things can get. In 2000-02, stocks ran into trouble when investors drove prices of tech stocks and most stocks to shaky levels relative to their earnings. When the tech bubble burst, it took the whole market down, causing a 49.1% drop over 31 months.

The 1987 bear lasted just three months, but most of the overall 33.5% decline occurred in one day, the Oct. 19, 1987, when the market crashed.

The 1973-74 bear market was caused by a host of factors common today. Inflation was out of control while oil prices skyrocketed, thanks to the Arab oil embargo. The economy slumped into recession. The stock downdraft lasted 21 months and knocked stocks down 48.2%.

The bear market designation is arbitrary, but it’s not pointless. Investors and traders have been trained to act differently in a bear market. For traders, it’s relatively easy to make money in a bull market buying and selling stocks. In reverse, it gets frustrating no matter what trading tactic you use in a bear market, because most stocks keep sliding downward. Once an official bear market hits, investors usually begin to dump everything.