Reuters

NEW YORK - Major US 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 US 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.

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 US economy into perspective, US 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.

Vanguard said that both the number of cash withdrawals and their dollar value have grown in recent years for the defined contribution plan.

But Vanguard's Nessmith and Utkus added that the absolute level of withdrawals remains quite low even though the percentage rate of change is high.

Charles Schwab & Co., the largest US discount broker, also has seen a similar trend. The percentage of Americans lowering the amount they are saving with regular contributions to their 401(k) plans is climbing. In the first quarter of 2008, 7.1 percent lowered their contribution rate -- up from 5.8 percent in the year-ago period, according to Charles Schwab data.

"It certainly doesn't help matters that people are freaking out and taking their money," said Brian Gendreau, an investment strategist in New York for ING Investment Management Americas.

"This will help to contribute to a longer drawn-out down market," Gendreau said.

During volatile periods, investors are told not to make panicky decisions and to stay well diversified. But the bursting of the credit and housing bubble has hit Americans to such an extent that they may have no choice but to dip into their savings.

So far this year, US equity funds have suffered withdrawals of roughly $52.7 billion, by far the worst first half for the group since EmergingPortfolio.com Fund Research in Cambridge, Massachusetts, began tracking them in 2000.

"It's money chasing returns ... it happens on the way up and it happens on the way down," Gendreau said.

All told, Mohamed El-Erian, co-chief executive officer of California-based Pacific Investment Management Co., or Pimco, which oversees $812 billion in assets, said in an interview that the American consumer will continue to be under duress.

"In the absence of significant new and targeted capital," El-Erian said, "the current dynamics in the housing markets will force further asset disposals which, in turn, will push prices lower, causing yet another round of sales and foreclosures."

Nationwide, more than 8,000 properties enter foreclosure each day.

The broad consequences of the credit and housing crisis have been nothing short of stunning.

On Monday, American Express Co. said that its most affluent cardholders, also known as "superprime Cardmembers," spent less on discretionary purchases in the second quarter, contributing to unexpectedly weak earnings.

"It just shows that no one is insulated from the crisis," said Paul Hickey, co-founder of Bespoke Investment Group in Mamaroneck, New York. "This shows that even the best of the best aren't doing so hot."