Buy Signals Abound in U.S. Stocks Shadowed by 1970s (Update2)

March 17 (Bloomberg) -- U.S. stocks are on the brink of the broadest bear market in four decades as investors ignore the strongest buy signals in almost 20 years.

The retreat by all 10 industries in the Standard & Poor's 500 Index pushed the measure down 19 percent since its Oct. 9 record and 14 percent since the start of the decade. The plunge resembles declines in the 1970s and 1930s, the two worst periods for U.S. equities in the past 80 years. The last six times the index has fallen by 20 percent, only once -- on Black Monday in 1987 -- has the sell-off been so encompassing.

``I tend to agree with the fellow who says, `Hey, this is the greatest financial crisis since World War II,''' said Jean- Marie Eveillard, 68, who runs the $21.3 billion First Eagle Global Fund in New York. The fund, which has returned an average 15.2 percent each year this decade compared with a less than 0.1 percent annualized gain for the S&P 500, has about 25 percent in cash and gold, more than its holdings in U.S. stocks. ``Investors who take the attitude that the economy will be slow in the first half and then it will turn around, they're probably dreaming.''

The declines have left companies in the S&P 500 trading at the cheapest levels in more than 18 years to forecast profits, while valuations versus 10-year Treasuries are the lowest in at least two decades. Investors aren't acting on the traditional buy signals in the midst of the worst housing slump since the Great Depression, $200 billion in bank losses tied to mortgages and the bailout of Bear Stearns Cos. last week by the Federal Reserve and JPMorgan Chase & Co.

JPMorgan Chase agreed to buy Bear Stearns for about $240 million, less than a 10th of its value last week.

Johnson, Vietnam

The S&P 500 is now within 1 percentage point of the 20 percent threshold that typically defines a bear market. Financial firms including New York-based Citigroup Inc. and Calabasas, California-based Countrywide Financial Corp. have dropped the most. Financial shares tumbled 37 percent since October, the most among 10 industries.

Take away the one-day swoon Oct. 19, 1987, and the last time every industry fell as equities entered a bear market was more than 40 years ago, when Lyndon Johnson was president and U.S. troops were fighting in the Vietnam War, according to Bespoke Investment Group LLC, a Harrison, New York-based research firm.

The S&P 500 slumped 0.4 percent last week, its third straight drop. The MSCI Asia Pacific Index fell for a second week, losing 2.6 percent. The Dow Jones Stoxx 600 Index of European shares lost 1.2 percent.

Declines Deepen

The declines deepened on March 14 after Bear Stearns, the second-largest underwriter of U.S. mortgage bonds, required a rescue by the Fed and New York-based JPMorgan, the third-largest U.S. bank, with emergency funding after saying its cash position had ``significantly deteriorated.'' Bear Stearns, based in New York, lost almost half its market value that day and dropped another 88 percent to $3.58 as of 9:43 a.m. in New York today.

The S&P 500 fell 1.8 percent today, while the Stoxx 6000 retreated 3.8 percent.

``We'll see further de-levering before we see a floor in equity values,'' said Bob Parker, vice chairman of Credit Suisse Asset Management in London, which manages more than $600 billion.

Losses at financial firms from the mortgage collapse may eventually triple to $600 billion as defaults on home loans grow, says Zurich-based UBS AG. One reason banks are losing money is the repeal nine years ago of the 1933 Glass-Steagall Act, which separated commercial and investment banking after excessive risk- taking contributed to the Great Depression, Eveillard said.

`Over The Cliff'

The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.

``Glass-Steagall protected bankers against themselves,'' Eveillard said. ``Bankers are sheep. They don't mind going over the cliff if everyone else goes over the cliff.''

Citigroup, which has fallen 32 percent since reporting the biggest quarterly loss in its 196-year history, may have writedowns of $15 billion this quarter, according to New York- based Merrill Lynch & Co. That would add to the $22 billion that Citigroup already lost because of the housing slump.

The fastest interest-rate cuts in two decades and record oil prices are fueling expectations inflation may accelerate even as the economy slows, a phenomenon known as ``stagflation'' that plagued the U.S. in the 1970s. Consumer prices were unchanged in February after jumping 4.3 percent in January from a year earlier, almost double the pace six months before.

`Is it Cheap?'

Yields on securities that protect against rising consumer prices turned negative for the first time ever last month, evidence investors are so sure the Fed will lose control of inflation as it tries to reignite growth that they are willing to give up interest payments to protect their principal.

``It would be a mistake for investors to rule out an unusually bad outcome,'' said Dennis Stattman, who runs the $46 billion BlackRock Global Allocation Fund from Plainsboro, New Jersey. ``This is not just a set of emotions taking over, with pessimism trumping abundant signs of spring.''

The fund, which can invest in stocks, bonds, currencies and derivatives globally, holds put options on the S&P 500 and structured notes that increase in value when the measure falls. The fund is also the most ``underweight'' U.S. equities of any asset class outside the dollar, he said.

Investors are skeptical of valuations because of the prospect of a stagnating economy, said Roland Lescure, chief investment officer at Groupama Asset Management in Paris. S&P 500 members are trading at 13.2 times forecast profit, data compiled by Bloomberg show. The last time the historic price-earnings ratio traded at that level was in 1989.

Versus 10-year Treasury notes, U.S. stocks yielded 1.62 percentage points more in earnings in January, the widest advantage since at least 1986, according to Bloomberg data.

``The market is cheaper, but is it cheap?'' said Lescure, 41, who oversees $140 billion. ``I am not so sure. There is more bad news to come.''