Bear Hug Welcomed the Second Half

Bear Market Officially Arrived As Oil Prices Hit New Record High

The stock market headed into the second half of the year with disappointed news as the Dow Jones Industrial Average lost 166 points today and closed at 11,215.51. The Dow officially entered the bear market territories as it plunged more than 20% from the October 9, 2007 high, when the Dow hit its all-time record high close of 14,164.53. This marked the end of the last five-plus year bull market.

This is the first time since 2002 the Dow has closed below the threshold that signals a so-called bear market. A 20% decline is the traditional measure of a bear market. Since its establishment up in 1896 to 2007 the Dow was down on average 34.63% during the bear markets that lasted, on average 11.5 months.

The S&P 500 plunged to 1,261.53, extending its 2008 loss to 14%. The S&P 500 has dropped 19.4 percent from its October 2007 record, just shy of the 20% required for a bear market. In the average bear-scenario, the S&P 500 declines by 29%.

In the meantime, the Nasdaq Composite Index slid to 2,251.46, leaving it lost 21 percent from a nearly six year high on Oct. 31, 2007.

Pulling down stocks today was a combination of another new record for crude oil price that climbed $143.57 a barrel and renewed fears about the financial sector. There are just a lot of very negative things happening in the moment. The record oil prices dim the outlook for corporate profits. Housing market slump and credit problems have squeezed home equity loans, which in turn limited consumer purchasing ability. While unemployment has been going up rapidly, skyrocketing gasoline prices and rising food prices have eaten into consumer discretionary spending. Consumers have lost their confidence as indicated by the consumer confidence index that sank to a 16-year low in June.

This bear market offers new opportunity to buy stocks when most people want to sell. In the short term the market will be very volatile, but over the long term it is safe to say stocks will increase. As we can learn from the last bear market, which was back in 2001 after the dot-com meltdown, the Dow returned to a bull market in October of 2002.