Bearish battalions

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They rarely ring a bell at the bottom of bear markets. Investors who thought they had heard a tinkling sound when Bear Stearns, a failing American investment bank, was bundled into JPMorgan Chase in March have been disappointed. The Dow Jones Industrial Average is now weaker than it was in the spring (see chart).

The American stockmarket had its worst month since 2002 in June and is now down more than 20% from its peak, the definition of a bear market. It is not alone. According to Standard & Poor’s, a rating agency, the value of global stockmarkets fell by $3 trillion during the month, thanks in particular to a 10% decline in emerging markets.

Share prices are suffering because of the outlook for four forces that impel stockmarkets: economic growth, profits growth, interest rates and inflation. At the moment, the first two seem to be slowing while the last two are rising. That is the worst possible combination.

Soaring oil and food prices are stoking inflation. Oil closed at another peak of $144.14 a barrel on July 2nd, because of disappointing data on American crude reserves, and lingering fears that sabre-rattling between Israel and Iran might lead to conflict in the Persian Gulf. High commodity prices have also acted as a terms-of-trade shock for consuming countries—the things they buy from abroad cost more compared with the things they export. That has made them poorer.

The past six months could be seen as a dreary exercise in sharing out the pain. Will workers suffer by seeing their wages rise more slowly than inflation? Will companies have to compensate their workers by raising wages, sacrificing their profit margins? Will central banks treat high commodity prices as a blip, and leave real interest rates low, penalising savers? Or will they raise interest rates and risk pushing the economy into recession? None of these choices is palatable.

All this has been made worse by the credit crunch. True, the rescue of Bear Stearns seemed to avert the implosion of the financial system. Credit spreads, which measure the excess interest rate paid by riskier borrowers, have fallen from their March peaks, although they have recently been rising again.