Are We in a Bear Market or the Start of a Bull Market?

BOSTON ( TheStreet) -- The benchmark S&P 500 Index earlier this week almost fell into a bear market, defined as a 20% decline from peak to trough. And that's after the index of the largest U.S. companies doubled in two years. What gives?

While I myself don't dwell on bull- and bear-market cycles, it sometimes helps to take a step back to see the big picture and tune out the noise. The recently concluded bull market, at least according to some, reached a peak April 29, marking a perfect 100% increase from its start March 7, 2009. The most recent bear market, which is undisputed due to its 56% plunge, began Oct. 12, 2007 and reached a bottom March 6, 2009.

Could we be on the verge of another major collapse, similar to the one during the financial crisis? If so, a drop greater than or equal to the mess back in 2008-2009 means the S&P 500 would be on its way to 763, a slide of another 33% from today.

Are things really that bad? What could cause the U.S. stock market, which has been on the mend for more than two years, to fall to such levels? There are as many cogent arguments -- by Wall Street market strategists, more to follow -- that say stocks will rebound in the weeks and months ahead.

First, the biggest problem: the European financial crisis. While the prospects of a Greek default have been priced into the equity market, another default in Europe would significantly damage the U.S. There are cracks in France and Italy, in addition to the weaker Spain and Portugal.

But let's ignore Europe for now and review the obstacles here at home. The major U.S. economic concerns are unemployment, housing and productivity.

As for unemployment: The U.S. jobless rate is still hovering above 9%, where it's been for most of two years. Federal Reserve Chairman Ben Bernanke even acknowledged in a recent speech that the jobs market is in a "national crisis." Improvements have been non-existent, leaving the Fed and Bernake scratching their heads.

Housing is still in a slump. Over a third of recent home sales were foreclosures or short sales and, with throngs of shadow inventory hiding in the wings, the pain will remain. Not even rock-bottom lending rates can prop up the housing market, a sign consumers fear losing that weekly paycheck.

For the good news, the U.S. has managed to stay above the magic 50 level on the ISM readings, meaning the economy is expanding. (A level below 50 means the economy is shrinking.) The ISM Manufacturing September reading came in at 51.6, up from 50.6 in August. The Non-Manufacturing measure fell in September to 53 from 55.3 in August.

Despite the pessimism, some major Wall Street equity strategists are bullish. They predict the S&P 500 will finish the year at 1,300 (based on a Bloomberg survey of 12 strategists), which marks a 13% increase from today.

Bear market or no bear market, the U.S. economy is struggling. Add in the potential for European banking defaults and the odds of a double-dip recession here at home, and investors are rightfully worried. So where do investors put their money during this volatility? I reviewed the bear market of 2008-2009 and scouted out the best- and worst-performing industries, along with underperforming and outperforming stocks.

Over the stretch of nearly 500 days from Oct. 12, 2007, to March 6, 2009, the best-performing industries were as follows: brewers, education companies, gold, health-care services, biotechnology, discount retailers, restaurants, and agriculture and fertilizer stocks. Those sectors fell but still outperformed the broader market.

The worst industries? You could have guessed a few of these: Thrifts and mortgage companies, carmakers, consumer-finance firms and consumer-electronics companies.

Some of the best-performing companies included Wal-Mart ( WMT), McDonald's ( MCD), IBM ( IBM), Netflix ( NFLX), Autozone ( AZO), Devry ( DV), Family Dollar ( FDO), Gilead ( GLD) and Ross Stores ( ROS).

The worst? Citigroup ( C), AIG ( AIG), Genworth ( GNW), Hartford Financial ( HIG), E*Trade ( ETFC) ... see a pattern here?

While many companies have had the time to repair balance sheets and control costs, the unknowns could be too much to overcome. I don't believe the U.S. economy is in as bad a shape as it was three years ago, but if there is a contraction, I would expect the same sort of stocks to outperform. The banks are still weak, and the balance sheets still opaque. Instead of toxic derivative exposure, it's European exposure. Maybe a different tune, but the turnout could be all too familiar.

Stock up the shelves with the top blue-chip dividend names, ones that could withstand an even weaker consumer. I believe the same industries could be winners again if things get worse. Look at companies like Anheuser-Busch Inbev ( BUD), McDonald's ( MCD) or any of the discount stores such as Family Dollar ( FDO). If the labor market gets worse, employees will need to upgrade and improve skills, meaning for-profit education companies could be winners again.

Gold, a safe haven in times of stress, could also be a good option. The SPDR Gold Trust ( GLD) increased 19% during the last bear market, and, with a 15% drop over the past few months, could be a good choice for portfolio diversification.

Are you worried about a double-dip or feel like we're in the midst of another bear market? Feel free to comment here or on Twitter at @bostoncfa.

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Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser.

Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

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