Global stocks officially entered a bear market this week as the benchmark MSCI World Index fell more than 20 percent from its most recent high in May. Investors say the U.S. is next.
The selloff—which pushed markets from China to Portugal into bear territory—came as fears of a Greek default escalated and economic data around the globe hinted at a worldwide recession.
“You can make an easy argument that the Dow Jones Industrial Average will play catch up by 10 percent to other developed nations,” said Dan Nathan, an options and equities trader who runs Riskreversal.com. “Sixteen of the Dow 30 get more than 25 percent of their revenues from Europe. Something has to give because if 2008 taught us anything, it is that developed economies do not de-couple.”
The Dow hit its bull market high on April 29, closing at 12,810.54. The benchmark Friday is about 17 percent off from that high after its worst week in almost two years.
The MSCI World Index encompasses the equity performance of 24 developed markets. Following eight 20 percent pullbacks for the index since 1987, the measure, on average, goes on to fall another 9 percent, according to research by Birinyi Associates. If history is any guide, about 80 more days of weakness are ahead with a bottom at the start of December, according to Birinyi.
Nineteen of 29 major world markets—both developed and emerging—are now in bear markets, according to data gathered by Birinyi.
China and Portugal stock benchmarks end the week down about 23 percent for the week. India, Australia, Japan and Taiwan also breached the 20 percent mark as well this week. France and Germany were already well into bear marketterritory entering the week and are now down more than 30 percent.
Data released this week included a measure of manufacturing in China, which decreased for a third straight month, and the Euro-zone’s own purchasing managers survey, which showed an actual contraction in activity for the first time in two years.
A drop in bank stocks led U.S. declines this week after the Federal Reserve called the risks to the domestic economy “significant.”
“The addition of the word ‘significant’ may have been to justify additional action to internal skeptics or outside critics, bit it apparently backfired on the Fed,” wrote Michael Hanson, an economist with Bank of America Merrill Lynch, in a note to clients. “The damage from the financial crisis and housing bust is simply too extensive. The recovery process is bound to be gradual and at times painfully slow.”
A painfully slow recovery won’t help the Dow’s chances at skirting a bear market.
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