US on brink of a bear run

Despite assurances from analysts, investors are rattled by turmoil in Japan and Russia. Philip Boroff reports

THE US stock market, and with it most of the world's other bourses, is teetering dangerously close to its first bear run since the start of the 1990s. As stocks soared in recent years, investors said one thing that could surely derail the bull market would be an "exogenous shock", such as a major financial collapse abroad.

Now, with the Asian econ-omies in recession and Russia's verging on collapse, "exogenous shocks" are going off around the world. And stocks from New York to Kuala Lumpur have tumbled.

The Dow Jones Industrial Average is down 10 per cent from its peak on 17 July, a decline that qualifies as a "correction". That's halfway to the official 20 per cent drop that qualifies as a bear market - a long run of falling shares. Out of 57 major stock markets, only the Costa Rican and Israeli benchmark indexes eked out gains during the past month, in dollar terms. The other 55 fell, led by Russia's stock market index, off 37 per cent.

US investors are in the midst of a fierce debate about what turmoil abroad means for the domestic market, the backbone of which is formed by retail investors. Abby Joseph Cohen, an investment strategist at Goldman Sachs, has said repeatedly that investors are over-reacting, and that profits will keep growing enough to support higher stock prices. Yet even after assurances from the market's most accurate analyst, investors remain rattled.

"I'm close to being in the Abby camp," said Uri Landesman, a money manager with JP Morgan Investment Management. "But the possibility of a meltdown, particularly in Japan, is real. The big issue is whether some sort of global collapse is yet to happen if Japanese institutions have serious trouble."

Mr Landesman, for one, does not expect a financial collapse in Japan - but he said it was impossible to rule it out.

For the week, the Dow fell 2 per cent, the Standard & Poor's 500 Index dropped 2.5 per cent, and the Nasdaq Composite Index lost 3.1 per cent.

The Dow fell four out of five days, and swung widely. It fell 1.3 per cent on Tuesday, rose 1.1 per cent on Wednesday and fell 1.1 per cent on Thursday.

Investors' concerns can be summed up in two words: "Japan" and "Russia". Japan's economy, the world's second-largest, will probably contract by 1.7 per cent this year, according to the International Monetary Fund. Declining demand undermines US exports. And a collapse of Japanese banks, which are weighed down by billions of dollars in bad loans, would have a big impact on markets around the world.

Russia's stock, bond and currency markets have tumbled as investors fret that Moscow will devalue the currency. Investors and traders are concerned that a financial collapse in Russia could further undermine the Japanese economy.

"It's a cliche that traders don't like to hold stocks over the weekend," said Ed Laux, the co-head of equities at ABN-Amro. "But it's true that people don't want to hold stocks because they don't know what will happen in Russia. There's a heightened level of uncertainty. A lot can happen when you're on the beach or the golf course."

Yet Ms Cohen told her clients on Thursday that a global recession is nowhere in sight.

"What's happening in Russia is important for Russia," said Ms Cohen. "But regarding the cobined former Soviet Union - that whole area takes in less than 1 per cent of US exports. The order of magnitude of trade to Russia is statistically so small that it doesn't matter to the US."

Ms Cohen added that while trade with Asia accounts for one-third of US exports, it makes up just 4 per cent of US gross domestic product.She said that operating earnings for companies in the Standard & Poor's 500 Index grew 6 per cent in the second quarter of the year. While steel and energy companies are getting pummelled amid declining commodity prices, "much of our trade involves advanced technology manufactured goods, computer software, entertainment and publishing, and high-level services," she wrote to clients. "Many of these items are not overly sensitive to the general level of global economic activity."

Still, in the most recent quarter, virtually all the 30 stocks in the Dow average - from JP Morgan and American Express to DuPont - said the slowdown in Asia affected their results.

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