Dow Jones index becomes bear bait after dire month

• Andrew Clark in New York
• The Guardian,
• Saturday June 28, 2008
• Article history

Wall Street is teetering on the brink of an official bear market after a miserable day of trading yesterday completed the worst June for American stocks since the Great Depression of the 1930s.

A fresh clutch of warnings about the health of leading banks, together with a new record high of $142 for a barrel of oil, sent the Dow Jones industrial average down 106 points to 11,346. The blue-chip index has fallen 450 points in two days and is 19.9% below its record high, set in October. The generally accepted definition of a bear market is a fall of 20% over a sustained period.

Many analysts consider that a bear market has been under way for some time in all but name. Peter Kenny, managing director at Knight Equity Markets in New Jersey, said: "We are already in a bear market. You see fundamentally sound companies being punished for the overall performance of the indexes."

London shares escaped the dismal mood as the FTSE 100 edged up by 11 points to 5,529, supported by a surge in mining and energy stocks as commodity prices rose. Traders suggested, however, that there was little conviction behind the rise. "It's the calm after the storm after the big falls yesterday and there's not a great deal of confidence to reverse them," said Andrew Bell, head of research at Rensburg Sheppards.

Concern about the credit crunch's effect on profits at investment banks continues to dog financial markets. Merrill Lynch was under the microscope as banking analysts at Lehman Brothers suggested that it could write off $5.4bn in credit-related losses during the second quarter.

The television station CNBC reported that Merrill's chief executive, John Thain, may opt for a sale of the firm's 49% stake in the asset management business Blackrock in order to raise cash.

Elsewhere, Moody's said it was considering cutting Morgan Stanley's credit rating. Many of the banks may be obliged to write down the value of loans because bond insurers, which guarantee repayment, have had their credit ratings reduced.

Brad Hintz, an analyst at Sanford Bernstein in New York, said a "very difficult 12 months" lie ahead for the banking industry. "We're certainly not through all the problems for the brokerage firms. Remember, we're in the midst of a slowdown in the economy which means all the institutional business has stopped."

In the US, the commerce department reported that consumer spending rose 0.8% in May as consumers began receiving economic stimulus cheques from the treasury of up to $600 a person.

But gloom spread to technology stocks which dropped after the struggling handheld computer maker Palm disclosed a quarterly loss of $43m. Its shares slumped 8%, and Canada's Research in Motion dipped by 2.5% as investors fretted that sales of BlackBerry devices could be losing momentum.

The week's financial bloodshed means that American shares are now in negative territory for the millennium. The Dow Jones index is below the mark of 11,497 at which it closed at the end of December 1999.