FTSE 100 ends week in bear market territory

The benchmark FTSE 100 index of blue-chip shares closed in bear market territory for the first time since the dotcom crash after it plunged nearly 3 per cent at the end of another dire week for UK investors.

The market has flirted with the bear market level all week as fears of a recession have grown, but managed to rally each time by the final bell. In the run-up to the weekend, however, it finished down 145 points, or 2.7 per cent, at 5,261.6, the lowest close since October 2005.

Peter Dixon, senior economist at Commerzbank, said: "This may be a technical benchmark, but it is a blow. This is the first bear market since the bursting of the tech bubble and there is potentially a lot more downside."

Investors were running scared yesterday as the oil price cont-inued to soar and bad news emerged from the US. Further weak numbers from retailers and house price warnings from the previous day only served to drag the FTSE 100 lower still.

The definition of a technical bear market is a 20 per cent drop in an index from its previous peak. In June last year, the market hit a high of 6,732.4, which set the benchmark for a bear market at 5,385.9. It smashed through that yesterday.

Fears of a recession have grown this week. Lehman Brothers put out a note yesterday saying its economists had cut their GDP forecasts, "taking us officially into a recession".

The sell-off – that saw the FTSE 100 hit new lows for 2008 – deepened in afternoon trade as the Dow Jones fell below 11,000 for the first time in two years, though it later recovered to close at 11,100.4, down just over 1 per cent. Fears grew for the US housing market amid speculation its government would have to salvage the mortgage lenders Fannie May and Freddie Mac. One equities trader in London said: "The sentiment was driven by Wall Street, with Fannie and Freddie setting the tone." He added that the markets had been unimpressed by a statement from US Treasury Secretary Hank Paulson.

Marc Pado, US market strategist at Cantor Fitzgerald, said: "The credit crisis is getting more intense, the run-up in oil is getting more intense and, of course, the potential for military conflict (with Iran) is intensifying."

Oil went above $147 a barrel yesterday as geopolitical fears over the Middle East intensified, as well as worries over supplies in Nigeria and Brazil. Oil and commodity prices soared, which lifted stocks such as miner ENRC and Cairn Energy to the top of the leaderboard.

Mr Dixon said: "The market is 20 per cent down and that is with the support of the miners on the index. Just imagine what happens when the commodity prices come off."

Commerzbank research found that the average duration of a bear market in the UK is 15 months, with a peak-to-trough decline of 35 per cent. Mr Dixon said the best case scenario would be a further 5 per cent drop, bringing the market to 5,000 points.

The most extreme case of a further 10 per cent fall would bring it to 4,775. Mr Dixon said: "We haven't seen that since 2001. People genuinely believe there isn't much value out there. Earnings will be under pressure and the UK won't be a great place to invest in the next 18 months."

One trader said: "This is proper bear market stuff. The rallies this week have been fewer and further between and no one really believes them." Retailers fell, with Kingfisher and Marks & Spencer faring badly, after bearish sales figures from John Lewis.

However, the trader said the sell-off could be a good thing for the market: "We need to clear the air, and bring the FTSE down to a more reasonable level with a big drop. Otherwise, this could be the summer of a thousand cuts."