The Bear Is Everywhere

While there’s been a lively debate among traders and investors as to whether the US is in a “real” bear market, or just a correction, most of the rest of the world is already there, and it’s only a matter of time before the question is settled, writes MoneyShow.com editor-at-large Howard R. Gold.

The S&P 500 index fell 17.8% from its April 29 peak to its recent low on August 10. That’s pretty close to the 20% decline commonly associated with a bear market.

It sounds like semantics, but it matters. Corrections, like the 16% we saw last year from April 23 to July 2, are followed by rallies that can take the market to new highs rather quickly. Bear markets, like the ones we had in 2002 and 2007, are deeper and much more prolonged.

So, here’s the bad news: The S&P may not be there technically yet, but many market sectors are. And huge swaths of overseas markets are deep in bear market territory.

As of Friday, the MSCI EAFE index was off 26% from its May 2 close (in dollar terms). But MSCI’s European index had lost 30% of its value, and the MSCI World ex-US index was down 26%.

Emerging markets stocks have been decimated. The MSCI Asia index has lost 27%, Latin America has given up 28%, and emerging Europe is off a whopping 37.7%. That’s a real bear market.

• Read Howard’s earlier warning on emerging markets on MoneyShow.com.

And some former high flyers have gotten their comeuppance: Russia and China are both down more than 28%, while Brazil has plummeted around 31% in dollar terms.

When measured in local currency terms, things look a little better for some countries like Brazil, India, Australia, and Sweden. But it doesn’t change the big picture. With some exceptions, there appears to be a bear market everywhere.

Nicholas Vardy, who writes the Global Guru newsletter and runs some trading services from L! ondon, p oints out that the S&P 500 has stayed above the lows it hit on August 10, around 1,120, and even bounced off it eight times since then.

But the broader MSCI EAFE index fell through support levels early in September, and the MSCI emerging markets index broke down last week. “Emerging markets are down 18% in September, a bear market on the basis of three weeks,” he told me.

The problem, of course, is Europe, which Vardy called “a disaster”—even Germany, which until recently had held up better than many others on the Old Continent.

“Their market is getting hit more than almost anybody else” on fears of a global economic slowdown and concerns that Germany may have to bear the brunt of a Eurozone bailout, he said.

Global stocks have been rallying in the last few days, on hopes the European Union will be able to put a package together to save Greece and other debtor countries like Portugal, Spain, and Italy.

Don’t count on it, said Doug Ramsey, director of research at The Leuthold Group in Minneapolis. Germany’s Bundestag votes Thursday on a months-old plan to increase the Eurozone’s emergency stabilization fund to 440 billion euros ($600 billion), but nobody thinks that’s enough to cope with the metastasizing crisis.

Ramsey said a Greek default “could still happen. The reality is unavoidable now. The question is, what is the recovery rate?”

Recurring worries about European debt and the global economy are behind the bear market, which his firm called in early August, when they started selling stocks and reduced their equity exposure to 33%.

But the major US averages have done relatively well, despite the European crisis, a weakening economy, and the toxic political battle that led to Standard & Poor’s downgrading our sovereign debt.

• Should Chris Christie run for president? Read Howard’s view and take the poll on The I! ndepende nt Agenda.