Loss size says no, but some stock gurus say bear market has arrived

Adam Shell | USA TODAY

The broad U.S. stock market is down more than 10% since the May peak, which in Wall Street-speak is just a “correction.” But a growing number of investment gurus are saying a bear market has already arrived on Wall Street.

After a 2.6% drop Monday to 1881.77, the broad Standard & Poor’s 500 stock index was down 11.7% from its May 21 record close of 2130.82 and on track for its worst quarter since the third-quarter of 2011. The double-digit percentage drop equates to an official correction, defined as a drop of more than 10% from a high. But the current downdraft, at least from a numerical standpoint, is still a far cry from a full-fledged bear market, or a drop of 20% or more from a peak.

Indeed, there’s still a vocal, sizable camp on Wall Street that says the recent market turbulence – which has been sparked by a slowdown in China, uncertainty over when the Federal Reserve will hike interest rates, and slowing earnings growth in the U.S. – is just a correction. And not the start of a bigger, "more sinister" downturn.

But the drumbeat of market pros that say the market is already in the clutches of the bear – or is heading for a bad ending -- is getting louder.

Jim Cramer, the ex-hedge fund manager and host of CNBC’s show “Mad Money,” has been vocal recently on air, saying repeatedly that he doesn’t like the market now, and last week said “we have a first-class bear market going.” Similarly, Gary Kaltbaum, president of Kaltbaum Capital Management, has been sending out notes to clients and this newspaper for weeks, saying the poor price action of the stock market and many hard-hit sectors, such as energy and the recently clobbered biotech sector, has all the earmarks of a bear market. Over the weekend, Kaltbaum said: “We remain in a worldwide bear market for stocks.”

Adding to the angst was word Monday that hedge fund titan and billionaire Carl Icahn is set to release a video Tuesday warning investors of danger ahead, due in large part to the coming fallout following years of cheap-money policies from the Fed that has created bubbles in things like art, real estate and high-yielding corporate bonds.

While the S&P 500’s drop from its May peak still is far from 20%, many of the index’s 500 stocks are suffering far more pain. An analysis of the performance of the broad market index after Monday's close showed that 253 stocks – or more than half the index – were down more than 20% from their recent highs, putting them firmly in bear-market territory, according to S&P Capital IQ. Nearly 86%, or 430 stocks, in the large-company stock index are down more than 10%. About 25%, or 121 stocks, of the index components were down more than 30%,

The discussion about whether an official bear market is coming has picked up in the financial press. In August, roughly 1,400 news stories published by Bloomberg included the term “bear market,” up seven-fold from about 200 mentions back in May at the market’s recent peak, according to BMO Capital Markets.

The key question, of course, is whether the current pain in the stock market gets worse, and pushes the S&P 500 into its first bear market since the last one that ended back in March 2009? The truth is no one really knows, but there’s always a chance the market could lose its footing and keep tumbling.

But a bear market is not the base case for most of Wall Street.

Strategas Research Partners, for example, recently held a market-focused get-together with 17 of its investment-related clients and despite all the red ink recently on Wall Street, “few participants seemed worried that the recent volatility in the market would turn into something more sinister.”

Similarly, Brian Belski, chief investment strategist at BMO Capital Markets, thinks the current correction has been long overdue. The pullback, he says, is normal and is nothing more than a correction, adding that the long-term bull market will reignite once the dark clouds clear. Belski notes that markets historically have bounced back after corrections, periods of heightened volatility tend to be short-lived and that sharp spikes in pessimism and fear, like we're seeing now, are a contrarian signal and could signal a price rebound is forthcoming.

“Despite the surge in bearish prognostications since the market nosedived during August,” Belski wrote in a report, “everything in our fundamental, quantitative and macro work still suggests that U.S. stocks should finish the year at higher levels, and by no means do recent developments alter our longer-term secular bull market stance.”

Thomas Lee, managing partner at Fundstrat Global Advisors, also believes the bull market remains intact. The current “buyers strike” and current “de-risking” on Wall Street, Lee believes, will give way to better conditions for stock investing in coming weeks and months. He says investors are now positioning for a market breakdown, and could need to adjust that bearish posture amid a market upturn. Another potential catalyst for U.S. stocks, Lee says, is the U.S. consumer, which is benefiting from more jobs, better pay and positive dynamics from housing and lower gas prices. Stocks, he adds, also still deliver a fatter dividend yield than the current yield on the 10-year Treasury note, which is yielding 2.10%.

Contributing: Matt Krantz, Los Angeles