S&P 500 Plunge Erases 50% of Gains From Bull Market

By Elizabeth Stanton

Sept. 18 (Bloomberg) -- The Standard & Poor's 500 Index's 26 percent drop since its October peak erased half of the gains from the five-year bull market and may signal more declines.

The benchmark index for American equities, which doubled to 1,565.15 on Oct. 9, 2007, from 776.76 five years earlier, plunged 4.7 percent yesterday after the collapse of Lehman Brothers Holdings Inc. and the government takeover of American International Group Inc. pushed credit costs higher.

The drop to yesterday's close of 1,156.39 may point to more losses, because so-called retracements of 50 percent typically precede further declines, according to some traders who look at historical prices and charts to make decisions.

``You could get some rally, but I don't think you've made a low,'' said John Roque, a managing director in technical analysis at Natixis Bleichroeder Inc., a New York-based investment bank. ``The whole way down we've consistently seen lower highs and lower lows, and that pattern has yet to be broken.''

Some investors say the market has fallen far enough. S&P 500 futures rose 1.5 percent to 1,180.4 at 12:03 p.m. in London, suggesting the benchmark for U.S. equities may rebound from a three-year low after the world's largest central banks said they will pump $247 billion into the financial system.

`Dry Powder'

``We're closer to the end than the beginning,'' said Jim Paulsen, who helps oversee about $220 billion as chief investment strategist at Wells Capital Management in Minneapolis. ``The reason fear is so good is that what idiot is left that hasn't sold? It means there are a lot of people on the sidelines with dry powder.''

The S&P 500 tumbled 7.6 percent this week after the government seized AIG and Lehman sought protection from creditors. Writedowns and losses at the biggest banks and financial institutions from the collapse of subprime mortgages and the first nationwide decline in U.S. home prices since the 1930s exceed $500 billion, fueling the almost yearlong retreat by the stock market. Financial companies led the tumble, losing 49 percent as a group in the S&P 500.

The S&P 500 surged almost sevenfold from 223.92 to 1,527.46 between Dec. 4, 1987, and March 24, 2000. Once the index posted a 50 percent retracement by falling below the midpoint of 875.69 in July 2002, it took less than three months to reach a low.

Fed Rates

Once the gains began, they proved short-lived. After the S&P 500 jumped 21 percent between Oct. 9 and Nov. 27, 2002, it plunged 15 percent through March 11, 2003.

Demand from emerging markets and the lowest Federal Reserve interest-rate target in half a century boosted the S&P 500 to an all-time high in October 2007, with fuel producers leading the surge. The market's retreat accelerated after the S&P 500 Energy Index peaked in May and then plunged 27 percent.

The S&P 500 Financials Index has tumbled 52 percent since its February 2007 record. That's the biggest slump for the industry since at least 1962, according to data compiled by Birinyi Associates Inc., a Westport, Connecticut-based research and money management firm.

Borrowing costs jumped yesterday as banks hoarded cash. The difference between what banks and the Treasury pay to borrow, the so-called TED spread, widened to 3.02 percentage points. That's higher than the 3 percentage-point difference reached Oct. 20, 1987, a day after the global stock market plunge known as Black Monday.

``I've been doing this for the last 30 years, and this ranks right up there with the crash of 1987 with regard to how my stomach feels,'' said Bernard McSherry, a senior vice president at Cuttone & Co., one of the largest floor brokerages at the New York Stock Exchange.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.