Not quite out of the woods

Not quite out of the woods

What is a bear market?

The usual definition is when shares have fallen by a fifth from a 12-month peak. The FTSE 100's recent high point was on October 14 when it reached 673o.7. A 20% fall implies a level of 5,385. This has now been reached twice during the past week's trading, but so far the index has managed to recover by the end of the day. Once it closes below 5,385, the bear market will be official.

What has caused this slump?

The long period of share prices moving ever higher came to an abrupt halt last October when the full implications of the US sub-prime crisis and the subsequent credit crunch began to sink in. The soaring oil price has led to inflationary pressures, making it more difficult for central banks to cut interest rates and prevent their economies sliding into recession. So with the spectre of rising inflation and slowing growth, investors have decided that companies will struggle to meet profit forecasts and have sold their shares. The declines have been exaggerated by short sellers borrowing shares to take out massive bets that prices will continue to fall.

Without the influence of mining and energy stocks the bear market would probably have arrived. The FTSE 250 index, which is more broadly representative of the UK economy, reached that milestone back in January.

How long will this go on?

The last bear market (in which share values more than halved) lasted from 2000 - the bursting of the dotcom bubble -.....continued below

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to the invasion of Iraq in March 2003. Following this latest retreat, analysts believe there is value in many company shares at today's low levels. Others think the FTSE 100 could fall to 5,000 before staging anything like a real recovery.

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