NEW YORK - WITH the Dow sliding into a bear market on Wednesday, the dark days on Wall Street are far from over, amid record oil prices, struggling consumers and the never-ending credit crisis.
The Dow became the second major US index to enter a bear market, following the Nasdaq in February. The broader S&P 500 is a little more than half a percent from the same fate.
News on the struggling economy could get much worse, with Thursday's government report on June payrolls seen as make-or-break. Any further worsening in the employment picture could stir more gloom about the health of consumers.
'I think we're seeing a capitulation of sorts and a sign that the market is really on its knees. The market needs a positive catalyst. It could be the jobs number,' said Mr Marc Pado, US market strategist and technical analyst at Cantor Fitzgerald & Co in San Francisco.
'Crude has a knife in our back and it keeps twisting,' he added.
Oil jumped to a record close of US$143.57 (S$195.25) a barrel on Wednesday. Add worries about slumping home values and a worsening corporate profit picture, and the outlook for Wall Street gets bleaker.
Based on historical patterns of bear markets, Wall Street's current slide has some ways to go before it plays out.
Since 1900, whenever the Dow has fallen into a bear market, it has on average shed 30 per cent of its value for the duration of the slump. Bear markets have tended to last just over a year.
The Dow's worst bear market occurred in the early years of the Great Depression, stretching from April 17, 1930, to July 8, 1932. The industrial average lost 86 per cent of its value in that period, falling from 294.07 to a bottom of 41.22.
The 30 current components of the Dow have shed a collective US$1.1 trillion since the index's record close on Oct. 9, 2007.
'When you look at the bear markets that have taken place since 1960, the average decline in the Dow has been 31 per cent and average duration 14 months. Using that standard there's a long way to go,' said Mr William Sullivan, chief economist at JVB Financial Group, in Boca Raton, Florida.
At Wednesday's close the Dow was down 20.8 per cent from its record close set on Oct 9, 2007, while the S&P 500 was down 19.4 per cent from its record also set last October.
The bulk of the damage in the Dow stems from slides in the shares of General Motors, grappling with slumping auto sales as soaring gasoline prices hurt demand for highly profitable trucks and SUVs, and American International Group Inc, the world's largest insurer, which has been buffeted by fallout from the mortgage crisis.
GM and AIG are the Dow's worst performers year-to-date, down 59.9 per cent and 54.1 per cent, respectively.
On Friday, Merrill Lynch said GM will need to raise as much as US$15 billion to shore up its finances and said its bankruptcy is 'not impossible' if the U.S. auto market continues to slump.
Meanwhile, the Nasdaq ended down 21.2 per cent from its 52-week closing high set Oct 31, 2007, a drop that also technically signifies a bear market run for the index.
The 20 per cent drop in the Dow industrials from its record close 'is just kind of an artificial line in the sand. It's more a validation that all hell has already broken,' said Mr Keith Hembre, chief economist at First American Funds, Minneapolis. -- REUTERS