U.S. Stocks Plunge, S&P 500 Heads for Worst Month Since 1938

By Nick Baker

Oct. 25 (Bloomberg) -- U.S. stocks tumbled this week, driving the Standard & Poor’s 500 Index toward the steepest monthly loss since 1938, on concern the global economy is sliding into a recession.

Alcoa Inc., Citigroup Inc. and Hewlett-Packard Co. retreated the most in the Dow Jones Industrial Average, losing more than 18 percent, as investors bet the financial crisis spread beyond banks to industrial companies and computer makers. General Motors Corp. approached the lowest price since the 1950s, and Ford Motor Co. plunged 17 percent.

“There are forced sellers and no one willing to stick their neck out,” said Henry Herrmann, Overland Park, Kansas-based president of Waddell & Reed Financial Inc., which manages $70 billion.

The S&P 500 retreated 6.8 percent to 876.77, the lowest level since April 2003. The benchmark index for U.S. equities plunged 25 percent in October. The Dow average fell 5.4 percent to 8,378.95 this week. The MSCI World Index of 23 developed markets lost 8.3 percent, while Brazil, Russia and India drove a gauge of 25 emerging markets to a 17 percent slump.

More than $10 trillion has been erased from the market value of shares worldwide this month as earnings decrease. The 236 companies in the S&P 500 that have reported third-quarter results posted a 23 percent decline on average. Reports yesterday showed the U.K. economy contracted for the first time since 1992 and growth in South Korea was the slowest in four years.

Every Market Falls

All 48 of the developed and emerging markets tracked by MSCI have declined in 2008, with 22 losing at least half their value. The 73 percent plunge by Russia’s Micex Index is the steepest. Benchmark indexes for China, Greece, Ireland, Peru and Austria retreated more than 60 percent. The S&P 500 dropped 40 percent. Morocco and Jordan have done the best, falling 6.4 percent and 19.2 percent, respectively.

It’s “panic creating a freefall as investors simply liquidate anything and everything,” said Walter Gerasimowicz, the New York-based chief executive officer at Meditron Asset Management, which manages $1.1 billion. “The market seems to be very overdone, almost pricing for a depression.”

The Chicago Board Options Exchange Volatility Index, or VIX, a gauge of how much investors are paying for insurance against S&P 500 declines, rose 13 percent to a record 79.13 this week.

Treasuries rallied, pushing the yield on the 30-year bond to the lowest in more than three decades. It sank as low as 3.8676 percent yesterday.

‘Very, Very Cheap’

“The U.S. and European markets have blown out to record levels of attractiveness versus bonds,” Barton Biggs, a former Morgan Stanley strategist who now runs the hedge fund Traxis Partners LLC, said during a Bloomberg Television interview. Stocks are at “very, very cheap levels.”

This week, 245 of the 500 companies that make up the S&P 500 dropped to the lowest price in a year or more. Russian equities are the cheapest in the world, trading for 2.5 times estimated 2008 profit. The 27 nations with price-to-earnings ratios of 8 or less include Germany, Turkey, South Africa, the U.K. and Indonesia. The S&P 500’s multiple is 11.

“There is an extreme level of pessimism and almost despair,” said Biggs, 75. “As long as I have been in the business, those have always been good signs.”

Alcoa fell 20 percent to a 13-year low of $9.41. Citigroup lost 18 percent to $12.14, the lowest price since October 1996. Hewlett-Packard declined 18 percent to $32.44. GM decreased 7.5 percent to $5.95, remaining above the five-decade low of $4.76 reached two weeks ago. Ford slipped 17 percent to $2.01.

REITs, Consumer Stocks Drop

Producers of metals, chemicals and other raw materials lost the most among 10 industries in the S&P 500, falling 11.1 percent as a group. Financial institutions declined 10.5 percent.

All 24 of the smaller S&P 500 industry groups slumped, led by real-estate investment trusts. General Growth Properties Inc., a Chicago-based mall developer, plunged 65 percent to $2.17 after the Wall Street Journal reported it may sell up to $2 billion in preferred stock. Developers Diversified Realty Corp., which owns shopping centers, lost 51 percent to $8.08.

Producers of consumer goods retreated. Liz Claiborne Inc., the maker of Kate Spade handbags, fell 33 percent to $6.95. Nike Inc., the world’s largest athletic-shoe company, slumped 17 percent to $47.79. Whirlpool Corp., the biggest appliance maker, dropped 20 percent to $49.16.

To contact the reporter on this story: Nick Baker in New York at nbaker7@bloomberg.net.