Now we're in it. The soup, that is. It's no fun watching the screen anymore. The market does to our net worth what the dentist does to a tooth that needs crowning. The grinding down seems endless; it gets discouraging and can be quite painful. It's possible to dull the discomfort by, for example, owning a sufficient quantity of puts, but as with Novocain, for maximum effectiveness the injection needs to be given well before the drilling starts.

Is this a bear market? It's beginning to feel like it. I write "feel" advisedly, because feelings or attitudes are important in affecting behavior. The simple colloquial definition of a bear market as one that has fallen by 20% is too pat, too arbitrary, for my satisfaction. By that standard, key

Nasdaq

and

Russell

indices are in bear territory, but other measures -- the

Dow

,

S&P

,

NYSE Composite

and

Wilshire

-- are not. If your neighbor's portfolio is down by 20% or more and yours is not, you can revel in relative performance. But the thrill of relative performance is tepid indeed when compared with the mood elevation that tends to accompany all-time new highs in the market.

Economists employ a 3D rule to test for phase changes -- is there enough depth, diffusion and duration to qualify a directional shift as a true phase change from growth to recession? Depth and diffusion go in the yes column for much of the market, but the duration of this downturn has not yet persisted long enough to establish the reality that "markets will fluctuate" in the minds of newbies and other dip-buyers. A deep oversold condition followed by a quick rebound is unlikely to be discouraging in the same way that persistent heavy grinding will be.

It feels heavy now. You don't have to search long to call up price charts with down-sloping channels delineated by lower highs and lower lows. Volume remains heavy when assessed against past norms, but has fallen off significantly from the trade-happy levels and instant gratification of the recently lapsed market uptrend.

Right now it feels to me as if the path of least resistance is for more grinding down. We could go a lot lower: It's not difficult to conjure a scenario that includes a vicious cycle of inflation upticks --

Fed

tightening, growth slowdowns, dollar selloffs ... inflation uptick. But a more likely, and somewhat less unpleasant possibility is that these are the first trading days of the rest of our lives, and that the extremely volatile sideways motion we have endured lately will tend to persist. Until the Fed is no longer actively trying to slow economic activity, it's going to be difficult to sustain much optimism or any upside momentum.

So, for the purposes of argument, let's call this a bear market. But just because we're in it doesn't mean we're almost through it. There continues to be a "thank-goodness-that's-almost-over" hopefulness out there, or a "bad-things-don't-happen-to-good-markets" attitude. But one of the side effects of a Fed success in slowing the economy is likely to be a dissipation of the sense of entitlement to quick capital gains.

If

Greenspan

could be expected to follow the

Powell

Doctrine -- strike with overwhelming force then make a quick exit -- the current market miasma might indeed soon be ready to lift. But gradualism in policy implies incremental effectiveness, with concomitant uncertainty along the way, which implies that we'll get out of the current slump only gradually.

One hopeful omen is that there is evidence of economic slowdown in the April numbers for housing, autos and other durable goods. But a slowdown to what pace? Private sector final demand grew at a double-digit pace in the first quarter -- it could fall in half and still be considered vibrant. A slowdown in housing and autos may be necessary to getting the Fed off our backs, but it's not sufficient.

With GDP growth now coming on in the rest of the world, U.S. producers will see a pickup in orders where before there was only slack. Dealing effectively with our record current account deficit, one that will approach 5% of GDP by the end of the year, means shifting productive resources from filling domestic orders to fulfillment of those from overseas. Monetary policy is not the most elegant means to turn Atlanta carpenters into Seattle machinists, but it's about all we've got.

This painful market is by no means the first one we have experienced. The "dips" associated with the Asia and Russia/LTCM crises of 1997 and 1998 were roughly as unsettling as the current malaise. But in 1997, the market simply had the forecast wrong -- it expected the little Thailand tail to wag the U.S. big dog. In 1998, a thoroughgoing financial panic was Powellesque in its impact, but was quickly and properly offset by Fed easing.

The situation now is much different. The current account imbalance is not a storm in a far-off land, as in 1997, but virtually a structural problem inherent in our own institutions and culture. And in contrast to 1998, there is no basis for hope of Fed easing. Quite the contrary.

The most likely movement, once again, is a continued sideways grinding action that is likely to persist until the potentially inflationary imbalance of wealth-induced domestic demand over productivity-enhanced supply -- an imbalance measured fairly precisely in the burgeoning current account deficit -- is brought under control.

The current account problem can be quickly transmuted into an inflation problem if the Fed allows the dollar to slide. Or, through effective defense of the dollar, it can become a demand-deferring and multiple-compressing elevation in interest rates. Either way, the excess domestic demand on display in the record gap in our trade account is a minefield that must be crossed before there is a stable base for an assault on new highs in the market.

Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to comment on his column at

GriffinJ@aeltus.com.