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Bloomberg.com: Invest: "S&P 500 May Lose Another 12% Before Bear Market Ends (Update3)

By Lynn Thomasson and Eric Martin
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S&P 500 May Lose Another 12% Before Bear Market Ends (Update3)

By Lynn Thomasson and Eric Martin
Enlarge Image/Details

July 10 (Bloomberg) -- The Standard & Poor's 500 Index fell into a bear market and may not stop tumbling until it reaches a level not seen since August 2004, if history is any guide.

The benchmark index for American equities plunged 2.3 percent to a two-year low of 1,244.69 yesterday, bringing the loss since its October record to 20 percent. A drop in the index of another 12 percent would match the average retreat of 11 bear markets since 1946, data compiled by Bloomberg and Bespoke Investment Group LLC shows.

Shares declined for five straight weeks as more than $400 billion of bank losses, record oil prices and the fastest commodity inflation in 35 years threaten to push down earnings for a fourth quarter. S&P 500 companies are forecast to report an 11 percent decline in second-quarter profits, according to the average estimates of analysts surveyed by Bloomberg.

``Until investors see what write-offs are going to be and second-quarter earnings, they're not interested in buying at any price,'' said Frederic Dickson, chief market strategist at Great Falls, Montana-based D.A. Davidson & Co., which oversees $23 billion. ``Our advice to our clients is that it's been far too early to buy. We want to see contributions by the banks to their loan-loss reserves stabilize before jumping in.''

The S&P 500 rose 0.7 percent today to 1,253.39 after Dow Chemical Co.'s agreement to buy Rohm & Haas Co. for $15.4 billion overshadowed a $5 increase in the price of oil.

Previous Bear Markets

The S&P 500's drop has lasted 275 calendar days and wiped out a fifth of its value. In the 11 previous bear markets, the index has dropped an average of 30.4 percent over 386 days, according to Bespoke, the Harrison, New York-based firm founded by Paul Hickey and Justin Walters that manages money for wealthy investors and provides financial research to institutions.

Hickey and Walters were formerly analysts at Westport, Connecticut-based Birinyi Associates Inc.

A similar decline would send the S&P 500 to 1,090, a level it last hit in August 2004, two months after quarterly profits expanded by the most this decade. The benchmark index at that point had climbed 40 percent from its bear market low of 776.76 on Oct. 9, 2002.

A 46 percent tumble in financial shares and a 29 percent decrease in a group of retailers, homebuilders and automakers has led the S&P 500's current decline. MBIA Inc., the bond insurer whose credit rating was reduced five times by Moody's Investors Service, slid the most since the S&P 500's all-time high, falling 94 percent. The Armonk, New York-based company gained 5 cents, or 1.2 percent, to $4.20 today.

Dow Average, Russell

The Dow average slipped into a bear market last week. The Russell 2000 Index of small-cap stocks reached a 20 percent decline from its peak on Jan. 17.

Rising borrowing costs have spurred concern that the nation's biggest sources of home-mortgage financing may not be able to fund their businesses. Fannie Mae, based in Washington, today dropped 14 percent to $13.20, the lowest since July 1991. Freddie Mac, based in Mclean, Virginia, tumbled 22 percent to $8, a 16-year low.

Banks in the S&P 500 lost 0.9 percent today, extending yesterday's 5.2 percent decline, which was the steepest drop since July 2002. The plunge on July 9 came a day after Federal Reserve Chairman Ben S. Bernanke said the central bank may extend securities dealers' access to direct loans into 2009.

`Like Cortisone'

``The various forms of stimulus are ultimately going to be unsuccessful,'' said Jason Trennert, chief investment strategist at Strategas Research Partners in New York. ``It's like cortisone. It allows you to play hurt, but it doesn't do anything to actually cure the underlying injury.''

Nine of 10 industries in the S&P 500 have fallen this year. Energy producers gained 2.7 percent today, leaving them up 1.3 percent for 2008. Oil, which dropped the first three days of this week on concern demand will slow as economic growth weakens, rose 4.1 percent to $141.65 a barrel today. Crude has gained 95 percent over the past year and touched $145.85 last week.

Retailers in the S&P 500 have dropped 18 percent since December as record oil prices, accelerating inflation and rising job losses weaken consumer spending. Hoffman Estates, Illinois- based Sears Holdings Corp., the largest U.S. department-store chain, slid 30 percent this year.

Consumer Prices

Consumer prices climbed 4.2 percent in the 12 months to May and the Fed said inflation risks have grown at the conclusion of its June 25 meeting. The Reuters/Jeffries CRB Index of 19 commodity futures added 25 percent this year. That would represent its biggest gain for any year since 1973.

Office Depot Inc. lost a third of its value this week for the second-steepest decline in the S&P 500. The world's second- largest retailer of office supplies reported second-quarter earnings below its forecast as U.S. employers cut jobs for the sixth straight month in June. Office Depot, located in Delray Beach, Florida, has fallen 33 percent to $7.20 so far this week.

``I haven't seen any signs of improvement, fundamentally or technically,'' said Walter ``Bucky'' Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. ``It's too early to move in.''

To contact the reporters on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net; Eric Martin in New York at emartin21@bloomberg.net.
Last Updated: July 10, 2008 17:45 EDT