U.S. stocks are in a bear market, Mikio Kumada, global strategist at LGT Capital Management in Singapore, told Bloomberg TV.
On Wednesday, the S&P 500 Index fell 24.32 points, or 2.07 percent, to end at 1,151.06. The Dow Jones Industrial Average dropped 179.79 points, or 1.61 percent, to finish at 11,010.90. The Nasdaq Composite declined 2.17 percent.
From peak to trough, the S&P 500 fell over 14 percent from the July 22 high. Although there is no official definition of a bear market, one generally accepted metric is a drop of 20 percent in a two-month period, according to Investopedia.
Kumada argued that U.S. stocks are in a bear market because the Federal Reserve disappointed the market and economic problems remain unsolved. In fact, they have deteriorated, he said.
The Federal Reserve, in its latest policy statement, announced Operation Twist, which lengthened the maturity of the Fed's balance sheet. However, there was no expansion, which fell short of expectations, said Kumada.
Authorities have not fixed the economic and financial problems plaguing the U.S. and Europe, he said. In both countries, there is also considerable political obstacle in reaching effective solutions.
Kumada said in a bear market, the best case scenario is for the market to bounce along the bottom for a while.
He expects occasional rays of hope to fuel small rallies, only to be replaced by reality sinking in and further market declines.
He also expects dollar-denominated commodities to perform poorly because the Fed's Operation Twist is supportive of the U.S. dollar.
In the medium-term and long-term, however, he likes gold because investors still distrust government monetary policy actions.
Currently, he said his organization is overweight cash, which is useful and flexible in an environment where investors are manic-depressive.
E-mail Hao Li at firstname.lastname@example.org.
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