US Markets Brace for A Selloff on Recession Fears

This week could mark the end of the bull market for Wall Street, with U.S. stocks likely to
join a global equity market plunge triggered by fears of a U.S. recession.

World shares got hammered, with the Australian market shedding a massive 7 percent, its biggest ever one day percentage drop. Japan nosedived 5.65 percent while South Korea closed down 4.4 percent.

In Europe, major indexes opened around 4 percent lower, after losing 6 percent Monday, the biggest slide since the terrorist attacks on September 11, 2001 in the U.S.

They later rebounded, trading nearly flat, after comments from French Finance Minister Christine Lagarde that the fundamentals of the European economy were strong.

Cash equity markets were closed on Monday for Martin Luther King Jr. Day. But Wall Street stock index futures tumbled more than 4 percent, suggesting a sharply lower open for Wall Street on Tuesday, after routs in Asian and European stock markets on Monday.

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Investors said last week a $150 billion White House rescue plan was too little too late, as more and more data signaled the U.S. economy was headed for recession.

If U.S. stocks open at the levels futures were indicating, it would push major indexes dangerously close to bear market territory -- or a 20 percent drop from their peak in October. That would mark the death of the bull market that was born in early October 2002.

"What we are seeing today are more signs that the shock waves from the U.S. are still expanding throughout the world, and we are still in the eye of the storm as far as credit issues are concerned," Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto, said on Monday.

The slide will continue on Tuesday, he said, adding that the global equity market rout was due to economic problems in overseas markets as well as in the United States.

The slide could be halted, however, if bellwether companies such as Apple and United Technologies engender hope that the U.S. economy can avert recession.

A slew of major corporations, also including Bank of America Corp, Microsoft Corp and AT&T Inc
, will release quarterly earnings in a shortened trading week that has scant economic data scheduled for release.

"Whether or not we end up in a prolonged bear market depends not only on whether we go into a recession but also on how long the earnings weakness plays out," Kumar said.

Dow Jones industrial average futures on Monday dropped 546 points or 4.5 percent. Should the Dow close lower on Tuesday by the amount the futures suggest, it would rank as the fourth-largest point loss ever for the blue-chip index.

S&P 500 futureswere down 62.5 points, or 4.7 percent. Nasdaq 100  futures slid 77.5 points, or 4.2 percent.

The Standard & Poor's 500 index closed on Friday down 15.33 percent from its peak close on Oct. 9. A fall into bear market territory for the S&P 500 would mean the end of the second-longest bull market for the benchmark index since 1929, according to the Stock Trader's Almanac.

One major stock index -- the Russell 2000 Index of small-cap stocks -- entered a bear market last week.

Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said the Russell 2000 is one of the most overvalued major indexes in the world and could tumble perhaps another 40
percent.

On Friday, the S&P 500 fell 8.06 points, or 0.60 percent, to a 16-month low of 1,325.19, capping its worst week in five  years. Both the Dow Jones industrial average -- off 59.91 points, or 0.49 percent, at 12,099.30 -- and the Nasdaq Composite Index -- down 6.88 points, or 0.29 percent, at 2,340.02 -- hit 10-month lows.

For the week ended Jan. 18, the Dow fell 4.02 percent and the Nasdaq 4.10 percent.

In light of the economic outlook, companies are going to be cautious regarding their guidance, said Owen Fitzpatrick, head of U.S. equities at Deutsche Bank Private Wealth Management.

In addition, the sharp sell-off of recent weeks might not be over, Fitzpatrick said.

"The market seems to be to some extent capitulating," he said. "I think we're finding a bottom, and that's not to say we might not find another one."

Among companies slated to report are financial heavyweights Bank of America and Wachovia on Tuesday; technology bellwethers Apple, on Tuesday, eBay and Motorola on Wednesday, and AT&T on Thursday. Among major industrials and big oil, UTX and ConocoPhillips report on Wednesday and Caterpillar Friday.

All eyes will be on bank stocks after after enormous losses linked to subprime write-downs at Citigroup and Merrill Lynch.

Companies that make up the S&P 500 are expected to post earnings growth of 15.3 percent in 2008, according to Reuters Estimates. At the beginning of the week, the S&P 500 was trading at 13.82 times forward earnings, Reuters Estimates said, below a historic average of about 15 percent.

Investors will sift data to assess the pulse of the nation's economic health from first-time claims for state unemployment insurance benefits and existing-home sales for December, both to be released Thursday.

The forecast for new jobless claims is 325,000, while the pace of existing-home sales is expected to show an annual rate of 4.95 million, according to Reuters polls.

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