Stocks face longer bear market as more tap nest eggs

By Jennifer Ablan - Analysis

NEW YORK (Reuters) - Major U.S. stock indexes, already trapped in bear territory, face a tougher road to recovery, as more Americans crack into their nest eggs to withdraw cash to cope with rising economic pressures.

The Dow Jones industrial average and the Standard & Poor's 500, which have fallen 20 percent or more from their closing highs of last October, qualifying them as bear markets, have taken big hits from the drastic slowdown in housing and credit as well as record oil prices.

The troubles hanging over the U.S. economy and the stock market are deep enough that a sharp rally this spring and a brief summer rebound have done little to reverse the damage. For the year so far, the Dow is down 14.4 percent, the S&P 500 is off 14.7 percent and the Nasdaq Composite Index is also down 14 percent.

Even worse, stocks that have dropped to where they are seen as compelling buys get battered further by renewed fears over the stability of the banking system.

"Every time the 'long only' guys tip their toes in the water, they get whacked -- it's been absolutely tough," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.

The whacking isn't going away anytime soon, however.

Baby boomers are adding another layer of anxiety for money managers looking for a sustainable stock market recovery during the year's second half. That's because boomers, born after World War II in the economic expansion between 1946 and 1964, are increasingly withdrawing funds from their defined contribution plans as the housing debacle gets worse.

BREAKING THE PIGGY BANKS

In a recent survey conducted by the AARP of more than 1,000 respondents aged 45 and older, almost 25 percent of individuals between the ages of 45 and 64 are prematurely withdrawing from their 401(k) retirement plans and other investments.

And the Vanguard Group, the fund company that's popular among retail investors because of its low fees, points to another worrisome sign: Last December, so-called "hardship withdrawals" shot up 22 percent from a year earlier.

The increase in hardship withdrawals at Vanguard suggests "rising economic pressures on financially vulnerable households, possibly related to the national crisis in subprime and adjustable rate mortgages," said William Nessmith and Stephen Utkus, authors of a Vanguard report on this alarming trend.

For years, as home values skyrocketed, people used their houses as glorified ATMs, pulling out money for all sorts of reasons. The trend helped support continued economic growth and recovery from the tech-telecom recession of 2001.

Although the Vanguard report didn't hone in on boomers per se, some members of that famous generation are struggling financially under the strain of sinking home prices, skyrocketing food and gasoline prices and a weak job market.

Boomers are now caught in the crossfire: According to a Harvard University study, boomers make up the single largest group of home owners -- 34 percent of all home owners.

Putting the importance of American home owners to the U.S. economy into perspective, U.S. Federal Reserve Chairman Ben Bernanke warned earlier this year that consumers were bearing the brunt of the effects of the current downturn because housing wealth had been tied strongly to spending and their homes were their biggest assets.