Stocks Hit Bear Market Territory

Major indexes fell below their lowest closing prices of the year Wednesday on worries over Thursday's jobs report and rising oil prices

Stocks dropped to their lowest levels of the year Wednesday, with major indexes slipping officially into "bear market" conditions.

Optimists had hoped stocks would never again see the lows hit in March, when the financial system panicked over the collapse of investment bank Bear Stearns. But on Wednesday, bad omens on the U.S. labor market and the rising price of oil helped drag major indexes below March's worst closing prices.

After Wednesday's descent, the Dow Jones Industrial Average and the Nasdaq Composite are both more than 20% off their most recent highs reached last October -- the broadly cited criteria for a bear market. The broad S&P 500 is 19.4% below its October high.

On Wednesday, the Dow fell 166.75 points, or 1.46%, to 11,215.51. The S&P 500 dropped 23.39 points, or 1.82%, to 1,261.52. The tech-heavy Nasdaq Composite lost 53.51 points, or 2.32%, to 2,251.46.

Wednesday's trouble started when economic reports raised worries over Thursday's crucial June payroll data.

The U.S. ADP report showed a 79,000 drop in private sector jobs last month, after a 25,000 increase in May. It's the largest decline since 2002. Also, Challenger reported announced layoffs fell 21,800 in June from May, but are still up 46.7% from the year before.

Traders were reading the data for clues to Thursday's jobs report, a look at the unemployment rate and other crucial measures of the labor market. RDQ Economics says the reports are consistent with data "which indicate a deterioration in the job market." RDQ expects a 100,000 drop in nonfarm payrolls, "but the risks are tilted toward a larger decline."

Even with those worries, stocks started Wednesday in positive territory. Moods darkened, however, when oil prices spiked higher. On the NYMEX, crude oil for August delivery set a new closing record of $143.57, up $2.60 from the previous day's closing price. After regular trading, oil continued to climb higher, trading above $144 late in the afternoon.

Despite the decline in stock indexes Wednesday, Ryan Detrick, senior technical strategist at Schaeffer's Investment Research, saw few signs of panic among investors. The CBOE Volatility Index, or VIX, a measure of fear in the market, rose 9.6% Wednesday, while Detrick would expect a spike of 20% or 30% on days of panicked selling.

One reason for the complacency is that, while stocks have dipped below their lowest closing prices of the year, they're still above their all-time lows of the year. For the S&P 500, that is the March 17 intraday low of 1,256.98. If that level is breached, traders who expected the March lows to hold could abandon ship. You could see "some true fear" in the market, Detrick says.

Thursday morning's release of jobs data could be a key test. Economists are expecting a 58,000 drop in nonfarm payrolls in June. Data on hourly earnings, average workweek and the unemployment rate will also be released.

"Whether the stock market cascades further or bounces in the days ahead could largely depend on the reaction to the June labor report tomorrow," says Standard & Poor's technical analyst Chris Burba.

In other economic news, U.S. factory order rose 0.6% in May, in line with expectations. The U.S. MBA mortgage market index rebounded 3.6% in the week ended June 27.

Among stocks in the news, Starbucks (SBUX) announced it will close 600 underperforming company-ooperated stores in the U.S. The coffee chain expects to open fewer than 200 new U.S. stores in fiscal 2009. Store closures could result in a $200 million write-off in Starbucks' third-quarter financial results.

Microsoft (MSFT) is still trying to take over Yahoo's (YHOO) search business. The Wall Street Journal reports that Microsoft has approached media firms including Time Warner (TWX) and News Corp. (NWS) about a joint deal that would lead to Yahoo's break-up.

Also, the Journal reported Yahoo pushed to sell itself to Microsoft for about $33 per share in mid-May.

General Motors (GM) shares fell 15% as a Merrill Lynch analyst warned that the automaker will need to raise $15 billion in cash, and said bankruptcy is "not impossible" for the firm. A GM representative said the company believes it has enough liquidity for 2008.

Blockbuster (BBI) dropped its proposal to acquire Circuit City CC. Meanwhile, Circuit City reiterated it is exploring strategic alternatives to enhance shareholder value.

Walgreen Co. (WAG) reported a 3.4% rise in June same-store sales. Total sales were up 9.9% at the drug store chain.

Avis Budget Group (CAR) expects its second quarter results to be below results a year ago, saying the quarter has been a more challenging environment than expected.

UnitedHealth Group (UNH) lowered profit expectations for 2008 from a range of $3.55 to $3.60 per share, to $2.95 to $3.05. Risk-based businesses saw lower profit margins than expected. Also, the company settled a class action lawsuit related to the firm's stock options practices. It will pay $895 million into a settlement fund.

Family Dollar Stores (FDO) reported earnings of 46 cents, vs. 40 cents a year ago, despite flat same-store sales. Total sales rose 2.9%. Next quarter, the chain expects same-store sales to rise 4% go 6%.

Major European indexes turned mostly lower late in the trading day on Wednesday. In London, the FTSE 100 index fell 0.98% to 5,426.30. In Paris, the CAC 40 lost 1.03% to 4,296.48, while Germany's DAX index edged down 0.17% to 6,305.42.

In Asia, Japan's Nikkei 225 moved 1.31% lower to 13,286.37, while Hong Kong's Hang Seng Index fell 1.8% to 21,704.45.

Treasury market

Treasury rallied Wednesday. The 10-year note rose 11/32 to 99-10/32 for a yield of 3.96%, while the 30-year bond climbed 23/32 to 97-29/32 for a yield of 4.50%.

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