Are Global Stocks Heading for a Bear Market?

Well it’s official. One of the world’s largest stock markets has now “officially” entered bear-market territory.

Last week, Japan became the first of the world’s 10 biggest stock markets to enter a bear market,” according to Bloomberg news. Japan’s benchmark Topix index, which is a broad gauge of stock prices in the land of the rising sun, has now fallen 21% from it’s highs reached early this year. That was before the U.S. credit-crunch began to shock financial markets around the world.

The commonly used rule-of-thumb for gauging bear markets is a decline of 20% or more from a previous peak. While a stock market “correction” is in place once an index has declined over 10%. Japan’s other major benchmark, the Nikkei 225 Index, is closing in on “bear market” territory with a decline of 18.3% from its 2007 peak.

Japan has Lagged for Years as Attractive Values Get Cheaper Still

Of course Japan has been a troubled market for years; decades in fact. The nation has been plagued by uneven economic growth as it struggles with the aftershocks of a deflationary spiral that lasted throughout the 1990’s, The Topix Index enjoyed a nice bull-run from 2003 to early 2006, more than doubling in value over that stretch.

However the bull market rally seemed to loose its steam that year, finishing little changed in 2006. The Topix then toped-out just above the 1,800 level in February of this year. A fund manager quoted by Bloomberg put it this way; “Japan hasn't been an area of stellar growth for 10 years.”

However Japan is an area of compelling value at this point. The world’s worst performing major index is now trading at just 17.5 times earnings, which is just HALF of its average value over the past four years. The index is even cheaper than the S&P 500, which is valued at about 17.7 times earnings.

Japan’s Topix Index is home to many of the world’s most undervalued banks too, including Mitsubishi UFJ and Mizuho, both of which have warned of profit declines this year due to shrinking loan demand and fallout from the U.S. sub-prime market shock. There are certainly some bargains on sale in the land of the rising sun – unfortunately for early investors (including yours truly) stocks that already appeared undervalued earlier this year have gotten even cheaper since then.

Global Markets in “Correction Mode”

But it’s not just Japan’s equity markets that have been suffering declines lately. In fact, the month of November, which has historically been kind to stock market investors, has instead been a particularly cruel month this year.  Most global markets have fallen this month.

In the U.S. the S&P 500 Index is down 8.6% from its recent high, and is rapidly closing in on “correction” territory. The blue-chip U.S. index has given up all its early year gains and is now about flat on a year-to-date basis, after suffering its worst monthly decline in November, since September 2002.

The selling hasn’t been confined to the U.S. and Japan however. The MSCI World Index of developed global stock markets has fallen about 8% from its record high reached on Halloween. Meanwhile, the MSCI Emerging Market index has declined 12% from its October peak. Global stock markets are in the midst of an across the board “correction.” Only time will tell if other major markets go the way of the Topix, entering bear-market territory next year.

Right now, I’m betting on just a “correction” which should result in some very attractive buying opportunities for global investors – especially in Japan.