U.S. Stocks Enter Bear Market as Dow Retreats 20% From Record

By Elizabeth Stanton

July 4 (Bloomberg) -- U.S. stocks fell this week, giving the Dow Jones Industrial Average a 20 percent bear-market drop since October's all-time high, as record oil threatened global growth.

Monsanto Co. and Nucor Corp. led raw-material producers in the Standard & Poor's 500 Index to the steepest drop since January. General Motors Corp. tumbled to the lowest price since 1954 after Merrill Lynch & Co. said the largest U.S. automaker may face bankruptcy. Lehman Brothers Holdings Inc. slumped to an eight-year low on speculation credit losses will force it to merge with a bigger securities firm.

The S&P 500 lost 1.2 percent to 1,262.90 for the fifth straight weekly retreat, the longest streak of declines in four years. The index sank to 1,261.52 on July 2, down 19.4 percent since Oct. 9 and the lowest since July 2006. The Dow slipped 0.5 percent to 11,288.54. The MSCI World Index of 23 developed markets fell 18.4 percent from its October peak through yesterday.

Among large companies, ``the biggest losers are names with international exposure,'' said Mark Freeman, a Dallas-based money manager at Westwood Holdings Group, which manages $8 billion. ``The market is calling into doubt that element of support is going to be with us going forward.''

U.S. markets are closed today for the Independence Day holiday.

Materials companies in the S&P 500 lost 5.8 percent, the most among 10 industries. Monsanto, the world's biggest seed producer, fell 6.3 percent to $120.21. It closed at a record $142.69 on June 17. Nucor, the largest U.S. steelmaker by market value, slumped 16 percent to $62.54. The company dropped 24 percent since an all-time high in May.

Coal Producers Fall

Massey Energy Co. led coal producers in the S&P 500 to a 12 percent retreat that pared their 2008 gain to 27 percent. Massey Energy tumbled 17 percent to $75.46 this week.

Caterpillar Inc., the world's biggest maker of earthmoving equipment, contributed most to the Dow's weekly drop, followed by Boeing Co., the second-largest commercial plane maker, and aluminum producer Alcoa Inc. Before U.S. stocks started falling on May 19, Alcoa had the top gain in the Dow for 2008. Caterpillar was No. 4.

Caterpillar slumped 4.7 percent to $70.31, the lowest since March 10. Boeing retreated 3.7 percent to $64.47, and Alcoa fell 7.4 percent to $32.78.

``It gives you a sense of how much momentum money had been attracted to some of these sectors, as well as a growing realization of the slowdown in front of us,'' said Daniel Manion, manager of the $1.3 billion Sentinel Common Stock Fund in Montpelier, Vermont.

29% Drop, 322 Days

This is the Dow's 12th bear market since 1962 and first since 2002, 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.

General Motors fell 12 percent to $10.12. Its July 3 closing price of $9.98 was the lowest since September 1954. Merrill Lynch analyst John Murphy said the automaker may need to raise as much as $15 billion and faces the possibility of bankruptcy.

The ``dramatic drop-off'' in the U.S. sales market probably will continue through 2009, forcing GM to find additional funding, Murphy wrote in a report. ``Bankruptcy is not impossible if the market continues to deteriorate.''

Lehman, the fourth-largest U.S. securities firm, fell to $19.81 on June 30, the lowest since May 2000. The shares rebounded to end the week at $22.85 after the company awarded mid-year bonuses to retain employees after posting its first quarterly loss since going public because of writedowns of mortgage-related assets.

Sagging Demand

Nvidia Corp. suffered the biggest drop in the S&P, falling 35 percent to $12.49, the lowest price since July 2006. Nvidia cut its second-quarter sales forecast because of a drop in demand and increased competition.

Family Dollar Stores Inc. rose the most in the S&P 500, gaining 16 percent to $22.52. The discount retailer reported 14 percent more third-quarter profit than analysts estimated as customers sought bargains while contending with higher gasoline and food costs.

Apollo Group Inc. climbed 15 percent to $55.18. The largest for-profit provider of college degrees beat per-share profit estimates by 9.7 percent, according to Bloomberg data.

Crude oil, which doubled in the past year, increased to a record $145.85 a barrel in New York yesterday. Its ascent is complicating the Federal Reserve's efforts to keep the economy out of recession amid bank losses stemming from the collapse of the U.S. subprime mortgage market, RBC Capital Markets strategist Myles Zyblock said in a report yesterday.

Shifting to Cash

He advised clients to cut equities to 55 percent of total investments from 60 percent and put the proceeds in cash. Zyblock downgraded financial shares to ``underweight,'' meaning the industry should represent a smaller slice of assets than is included in benchmark stock indexes.

``The equity market is without a parachute at the moment,'' he said. ``Financial and credit market-related stress is on the upswing.'' He added that ``surging energy costs are stealing from purchasing power and pressuring profitability.''

Yields on Treasury securities fell as traders pared bets the Fed will raise interest rates this year after lowering them seven times since September. The two-year note's yield declined to 2.53 percent from 2.63 percent on June 27.

U.S. employers cut jobs for a sixth straight month and service industries shrank in June, according to a government report yesterday. That's a sign the economic slowdown may deepen as the impact of federal tax rebates fades.

Jobs Losses

Payrolls fell by 62,000 after a 62,000 drop in May that was greater than first reported, the Labor Department said. The unemployment rate held at 5.5 percent after soaring the most in two decades in May. The Institute for Supply Management's non- manufacturing index sank to a five-month low.

As the Dow crossed the bear-market threshold on July 2, the benchmark index for U.S. stock options climbed to a three-month high. The VIX, as the Chicago Board Options Exchange Volatility Index is known, reached 25.92. It measures the cost of using options as insurance against declines in the S&P 500.

The Russell 2000 Index fell almost four times as fast as the S&P 500 this week, dragged down by companies added to the small- cap stock benchmark in its annual reconstitution. The Russell 2000, made up of companies with a median market value of $460.7 million, dropped 4.6 percent to 665.78. The losses cut the Russell 2000's advantage over the S&P 500 this year by more than half.

Alcoa is scheduled to report second-quarter results on July 8, becoming the first Dow company to do so. General Electric Co., the world's fifth-largest company by market value and also a Dow component, reports July 11. GE gained 2.5 percent to $26.91.

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