There is mounting evidence that the U.S. stock market is being decimated and undermined by a so-called “stealth” bear market. If it feels like a bear market on Wall Street — even though the 9.8% drop for the S&P 500 from its May peak doesn’t even meet the 10% dip needed to be classified as an official correction — it’s probably because hundreds of U.S. stocks are already suffering their own personal bear markets, defined as a price drop of at least 20% from a prior high.
Bear sightings, in turns out, are getting more and more plentiful with each passing day in 2016, a year in which the Standard & Poor’s 500 index is down 5.97% and off to its worst five-day start to a year ever. Statistics that drill under the surface of the stock market and into the underbelly of Wall Street paint a dismal picture of a stock market in retreat. Indeed, the Standard & Poor’s 1500 index – a broad basket of large, mid and small company stocks – shows that the average stock’s distance from its 52-week high is 26.9%, according to stats compiled by Bespoke Investment Group through Friday’s close.
“That’s bear market territory!” says Paul Hickey, co-founder of Bespoke Investment Group. Stocks, of course, have suffered a massive drawdown early in 2016 amid growing fears that China’s economy is in worse shape than believed, and the rising fear sparked by mainland China’s stock market meltdown. U.S. stocks, which peaked more than seven months ago back in May, also headed into the year facing domestic headwinds, such as uncertainty related to the Federal Reserve’s interest rate hike plans, a pricey market compared to longer-term norms, and concerns over the pace of corporate earnings growth after profits flatlined in 2015.
“China is certainly a factor, but it’s definitely not the only factor,” Hickey said. “We came into the year with above-average valuations and a Fed planning to tighten rates. That combination is usually not a great mix for stocks.” The bloodshed is also evident at the sector level. Individual stocks in eight of the 10 major sectors are down more than 20% from their highs within the past year. Only two sectors have dodged the bear so far: The average stock in the consumer staples sector is down 18.5% and utilities are 14.3% below their 52-week highs, according to Bespoke. Stocks in the energy sector — the worst-performing sector – are down 52.1%.