Slumping resource stocks are sending UK and European share indices into a tailspin. Is it a real bear market? And what happens now?
For a ‘real' bear market, how far must share prices drop?
Opinions vary, but most analysts would tell you that a 20% index decline would qualify for the annals of history.
If so, the bear market in Europe has officially started, according to the bizarrely spelt Dow Jones Stoxx 600 Index for leading UK and European shares, which has now fallen over a fifth from its recent high in June last year. With the FTSE 100 index itself down over 300 points this morning, London isn't far away.
So after today's market rout, we ask...
What's going on?
...and what's going to happen next?
There's been no dramatic announcement, no earth shattering event that has caused the deluge. Yet the Footsie is now nearly 17% lower than the 6725 level achieved less than three months ago.
Note that date... just three months ago!
Because by October last year we already knew about the US sub-prime mortgage mess and the burgeoning credit crunch.
We saw not just US banks, but lenders round the world already writing off chunky sums due to dabbling in dodgy debt.
We'd been aware for ages that the UK debt mountain was climbing out of control. Retailers on Britain's high streets had started cautioning that consumers weren't splashing the cash. Christmas was set to be a non-event, spending wise.
Those of us who monitor the money markets were muttering that leaping Libor interest rates - at which banks lend money to each other - were an early warning signal of trouble ahead.
And we knew the Rock was a crock.
Yet the stock market was still apparently OK.
Despite a nasty plunge as the first signs of credit constriction cropped up and as the bad news from Northern Rock first emerged, the FTSE 100 share index then bounced all the way back up when the Bank of England hinted that interest rate cuts were now on the agenda.
But actually, for 2007, the Footsie was something of an illusion.
Although the index ended the year up, as I have written before, many stocks were suffering badly. For several months, holders of shares in banks, commercial property, house builders, leisure and retail - in essence, most sectors linked to the UK consumer - have been enduring their very own bear market.
Though it was all masked by miners and oils. Indeed the Footsie's rise in 2007 was mainly fuelled by just a handful of powerfully performing resource stocks.
But now the screens are down.
As housing market horrors drag the United States into recession, demand for goods from China must shrink. Slower Chinese economic growth means lower metal prices.
The Baltic Dry index, which measures bulk shipping rates and is a useful monitor of raw material trade, has tumbled more than 40% from its peak in just two months.
Following that, London-quoted mining shares have now started plummeting.
And so has the FTSE 100 index.
Where will it end?
There will probably be a short-term rally, not least because the latest investor sentiment surveys show that most fund managers have turned bearish. That means they may have sold a fair number of shares already. But longer term, I believe there's further market weakness in the pipeline.
Although central banks may speed up interest rate cuts, with a 0.5% chop in US official loan costs at the end of January now a racing certainly, there's no guarantee that these will succeed in stemming the share price slides.
As one analyst put it, lowering rates is a bit like pushing on a string.
Because there comes a point at which the market falls start to feed on themselves. Confidence erodes and investors view rallies as selling opportunities. Eventually we could see ‘capitulation' trades, where stocks are dumped at any price, almost irrespective of share valuations.
That really would be a buying opportunity!
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