Bears on the rampage

The bear market that has devastated US stocks over the past six weeks, knocking some shares down almost 50 per cent, is now ready to rip through the industries that withstood the slump: retailers and computer-related shares.

"We've gone down harder than I would have anticipated in the initial stages of a bear market," said Robert Rodriguez of First Pacific Advisors in Los Angeles. "It almost doesn't matter what you own."

The Standard & Poor's 500 index has fallen 18 per cent since reaching a high on 17 July, and has dropped in six of the past seven weeks. Financial companies were damaged the most, with Travelers Group, a member of the Dow Jones Industrial Average, tumbling 46 per cent, and Citicorp, the second-largest US bank, losing 49 per cent.

Cisco Systems, Microsoft and Wal-Mart Stores, among this year's best performers, are the "next to go", said Martin Sass, the president of MD Sass Investor Services. Still, their price-to-earnings multiples are "way up there in nosebleed territory" given that earnings growth is slowing, he said.

Optimists say the worst may be over. Interest rates are low and the economy is growing. Typically, the opposite is true before stocks enter a bear market.

Thomas Galvin, of Donaldson, Lufkin & Jenrette Securities, reiterated his forecast of a 40 per cent rally in the market over the next 12 to 18 months. That would take the Dow Jones industrials well beyond 10,500.

Investors drove the Dow Jones average down 411 points, or 5 per cent, last week. Sentiment is so skittish that stocks may fall another 10 to 15 per cent, even though the S&P 500 is fairly valued given the outlook for earnings and interest rates, Sass said. A decline of that size would leave the Dow industrials at about 6,870.

Some investors are buying corporate bonds - hoping to reap big gains - after the market's month-long rout. The gap in yield between corporate bonds and Treasury securities ballooned to its widest in over seven years last week.

For those who don't expect the economy to tumble into recession in the near future, bonds of companies such as IBM and Fannie Mae are hard to resist.

"As long as people have jobs and keep spending money, everything will be okay," said John Kornitzer, of Buffalo High Yield Fund. "It's a matter of weathering the storm because it'll look great on the other side."