S&P 500 Drop Makes Decade Worst, Granville Sees Crash (Update2)

Oct. 7 (Bloomberg) -- Even the 1930s are looking better for U.S. stock investors after the credit crisis wiped out more than $6 trillion from equities in the past year.

The Standard & Poor's 500 Index lost 18 percent since the start of 2000 after sinking 11 percent this month, total return data compiled by Bloomberg show. The decline would be the first for a decade in 70 years and exceeds the 8.9 percent plunge in the 1930s, following the stock market crash of 1929, data compiled by New York University's Stern School of Business show.

``This is the worst financial experience in world history,'' said Joseph Granville, 85, a technical analyst who has been publishing the Granville Market Letter from Kansas City, Missouri for 45 years. ``We're in October, and the market is crashing. What we're seeing right now is complete demoralization.''

The S&P 500 stood at a record 1,565.15 one year ago, the peak of a five-year bull market that helped investors recoup losses from the dot-com bust at the start of the decade. Since then, the measure tumbled 32 percent, including dividends, as the collapse of the U.S. housing market upended the economy, froze credit markets and saddled financial firms with almost $600 billion in mortgage-related writedowns and credit losses.

Bear Market

The 12-month bear market pushed the S&P 500 to the lowest level since November 2003. Last month, Lehman Brothers Holdings Inc., once the fourth-largest U.S. investment bank, failed in the biggest bankruptcy ever. American International Group Inc., the largest insurer, was seized by the Federal Reserve. Fannie Mae and Freddie Mac, the top buyers of U.S. home loans, were taken over by the government.

While stocks lost money, 10-year Treasury bonds returned 86 percent this decade, data compiled by Bloomberg and Aswath Damodaran, a finance professor at New York University, show.

The S&P 500 decreased 1.4 percent to 1,042.33 as of 12:30 p.m. in New York after Bank of America Corp. said it will slash its dividend to shore up capital and concern increased that real- estate companies will default.

The economic fallout from credit-market losses and bank failures has yet to approach the proportions of the Great Depression, when 7,000 banks failed, according to the Fed. Between 1929 and 1933, the economy shrank by 46 percent, while one in four Americans were out of a job. Economists forecast U.S. growth of 1.5 percent in 2009, up from 1.7 percent this year.

Biggs Buying

That makes Barton Biggs, 75, a former Morgan Stanley strategist who now runs the hedge fund Traxis Partners LLC in New York, more sanguine that stocks may soon rebound.

``You've got to make a bet on whether the financial system and the market system as we have known it since the end of World War II is going to survive,'' Biggs said on Bloomberg Television. ``You certainly don't sell on panic here. You buy.''

Any rally may depend on efforts to unfreeze credit markets. Concern more financial institutions will collapse curbed lending, widening the difference between what banks and the Treasury pay to borrow money for three months to 3.87 percentage points last week, the biggest gap since Bloomberg began compiling the data in 1984. The spread has almost quadrupled in the past month.

The increase in borrowing costs may cause the U.S. government's $700 billion bailout package to fail, said Robert Stovall, who oversees about $1.6 billion as global strategist at Wood Asset Management in New York.

Land Speculation

The repercussions of real-estate speculation aided by the lowest interest rates in a half-century may weaken the broader economy further, and exacerbate share declines, according to Stovall, who began his career as a junior security analyst at defunct brokerage E.F. Hutton in 1953.

Earnings at S&P 500 companies fell 5.6 percent in the third quarter from a year earlier, according to consensus analyst estimates compiled by Bloomberg. That would be the fifth straight quarterly decline and match a streak ended in March 2002.

Companies in the S&P 500 are valued at 20.1 times profit from the past four quarters, about 25 percent higher than the median of about 16.1 times normalized earnings since 1972, data compiled by the Leuthold Group show.

``You don't cure a blast wound with a band-aid,'' said Stovall, the 82-year-old World War II veteran who has worked in the financial industry for more than 50 years. ``It's quite possible that the residue of all this damage could extend well through 2009.''

The S&P 500 fell during the first three years of this decade, its longest streak of annual declines since 1939 to 1941. Investors were battered by the bursting of the technology bubble that pushed share prices to their highest level relative to earnings, and the bankruptcies of Enron Corp. and WorldCom Inc., two of the largest U.S. companies by market value.

Arthur Cashin, a member of the New York Stock Exchange for 44 years, says the speed and scope of the latest global sell-off makes the financial meltdown more dangerous and harder to contain than any previous crisis after $25 trillion of market value was wiped out worldwide.

The credit crunch ``has become a financial forest fire,'' he said. ``I have never seen it happening contemporaneously all around the globe where everyone is impacted.''