Dow Average's 21% Drop Into Bear Market May Signal More Losses

By Elizabeth Stanton

July 3 (Bloomberg) -- The Dow Jones Industrial Average's 21 percent retreat from a record may foreshadow more losses for the 112-year-old stock gauge, based on its performance in previous bear markets.

``I don't expect this to be the end,'' said Dean Gulis, part of a group that manages about $3 billion in Bloomfield Hills, Michigan, for Loomis Sayles & Co. ``Stocks have been trending down now for basically a year. They're going to keep struggling for a while.''

The Dow slipped into a bear market for the 12th time since 1962 yesterday, according to Westport, Connecticut-based research firm Birinyi Associates Inc. Prior declines averaged 29 percent and lasted 322 days, Birinyi data show. The biggest was a 45 percent drop over 694 days starting in January 1973.

The longest profit slump in six years and the first nationwide decrease in home prices since the Great Depression pushed U.S. equities to a nine-month tumble. Growth in gross domestic product is forecast to slow to 1.4 percent over the next 12 months from 2.2 percent while inflation quickens, according to data compiled by Bloomberg.

The Dow slipped to 11,215.51, led by General Motors Corp. and Alcoa Inc. The 30-stock gauge closed at a high of 14,164.53 on Oct. 9. Its drop outpaced the 19.4 percent slump in the Standard & Poor's 500 Index, which is within 10 points of a bear market.

Growing bank losses and rising oil prices left U.S. companies poised for a fourth-straight quarterly retreat in profits, the longest streak since 2001, according to data compiled by Bloomberg.

GM, Citigroup Plunge

General Motors plunged 74 percent in the past nine months for the Dow's biggest decline as crude oil's 79 percent surge to $143.74 a barrel hurt sales of pickup trucks and sport utility vehicles. Citigroup Inc., American International Group Inc. and Bank of America Corp. each tumbled more than 50 percent as losses and writedowns at the world's biggest financial institutions topped $400 billion following the collapse of the U.S. subprime mortgage market.

Profits at S&P 500 companies decreased 10.5 percent during the second quarter, according to a Bloomberg survey of analysts compiled June 27. Earnings at financial firms and consumer companies reliant on Americans' discretionary income slumped 56.5 percent and 19.9 percent, respectively.

Dow Weighting

The Dow includes five financial firms: New York-based AIG, American Express Co., Citigroup and JPMorgan Chase & Co. and Charlotte, North Carolina-based Bank of America. While General Electric Co., based in Fairfield, Connecticut, is classified as an industrial company, its financial unit accounted for more than half of its profit from continuing operations last year.

General Motors fell to $9.98 yesterday, the lowest price since 1954, according to Global Financial Data, based in Los Angeles. The Detroit-based company, battered by the slowest U.S. automotive market in 15 years, faces the possibility of bankruptcy and may need to raise as much as $15 billion, according to Merrill Lynch & Co. analyst John Murphy.

The Dow average is a ``GDP play,'' said Mark Freeman, who helps manage $8 billion at Westwood Holdings Group in Dallas. ``To the extent the market is concerned about growth, and growth is going to be very tepid for the foreseeable future, it makes sense that the Dow is going to lag in that environment.''

The Dow, owned by Rupert Murdoch's News Corp., is intended as a measure of ``established U.S. companies that are leaders in their industries,'' according to a February statement in which Bank of America and Chevron Corp. were named as replacements for Honeywell International Inc. and Altria Group Inc. Companies in the Dow average have a median market value of $103.7 billion, almost eight times that of the S&P 500.

Less Energy

Although financial shares, the year's biggest decliners, make up less of the Dow than the S&P 500, the Dow has a smaller weighting of energy stocks. That's the only industry among 10 in the S&P 500 to gain since Oct. 9, driven higher by records for oil, natural gas and coal. Financials account for 10.2 percent of the Dow and 14.4 percent of the S&P 500. For energy, it's 13.4 percent compared with 16 percent.

Gains by another 19th century measure, the Dow Jones Transportation Average, signal the market may rebound. Dow Theory, created by Wall Street Journal co-founder Charles Dow, holds that advances or declines by the Dow industrials must be matched by similar moves in the transportation average to ``confirm'' the broader market's direction. Divergences aren't sustainable, the theory holds.

The transportation average rose to a record on June 5. Although it then fell 15 percent, it remains 12 percent higher than its 2008 low set in January.

No Recession

Dow Theory is ``telling you we're not having a recession,'' said Ken Fisher, Woodside, California-based chief executive officer of Fisher Investments Inc., which manages $47 billion. ``We could have a bear market without having a recession, but that's not what people talk about.''

Ralph Shive is betting that the U.S. economy will contract.

``We're due for a recession -- it'll go in the books as one -- and a bear market,'' said Shive, South Bend, Indiana-based chief investment officer of 1st Source Corp. Investment Advisors, which manages $3 billion. ``While they're never fun, the thing to remember is that markets will bottom well before the economic news gets better.''

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.