Late November rebound eases bear market fears

NEW YORK (Reuters) - It's been five years since U.S. stocks took as big a beating as they did this month, but their climb out of the cellar this week has fed optimism that November may not be the dawn of a bear market after all.

Just four days ago U.S. equity index benchmarks were all 10 percent or more below their 52-week highs, marking the first formal market correction in more than four years.

At the time, rattled investors appeared convinced that the unraveling of the housing and credit markets had much further to go, and stocks were not the place to be.

But in a wink, the mood changed. In a deal announced between Monday's market close and Tuesday's open, an Abu Dhabi government fund forked over $7.5 billion for a stake in Citigroup (C.N), triggering four days of gains for the Dow and S&P 500 to close out the month.

"I have a feeling the worst of the correction is behind us," said Edgar Peters, chief investment officer at Panagora Asset Management Inc. in Boston. "The chances of this becoming a full-blown bear market are pretty small."

The Abu Dhabi deal appeared to advertise what some investors had been arguing for weeks: stocks were bargains, and financial sector stocks were doubly so.

Indeed, standard valuation methods suggested stocks were their cheapest in more than a decade. The S&P 500's forward price-to-earnings ratio, based on projected earnings for the coming 12 months, troughed below 13.7 on Monday, their least expensive since 1996, according to Reuters Estimates.

Financial sector valuations had suffered more than others, dropping about 15 percent since mid-October to as low as 9.4 times estimated earnings as the outlook for bank profits eroded thanks to the credit crisis. At Monday's low, the S&P financial index .GSPF was more than 25 percent below its record high in late May.

NOVEMBER TO REMEMBER? NOT!

Even with the rebound since Monday, stock investors took a bruising in November, and not everyone is ready to say the worst is past.

The Standard & Poor's 500 .SPX and Dow Jones industrial average .DJI each fell about 4.4 percent on the month, their biggest monthly drops since December 2002 when the current bull market was in its infancy. The Nasdaq fell 6.9 percent, its worst monthly showing since July 2003.

"You would think that with things being as miserable as they were in November, we'd be close to a bottom," said Hugh Johnson, chief investment officer of Johnson Illington Advisors in Albany.

Still, Johnson remains troubled by the defensive character of the market's leadership this month.

When technology, industrial or consumer cyclical stocks head the pack, as was the case earlier in the year, it suggests the broader market will rise because these sectors point to confidence in the economic outlook.

Yet the standouts for most of November were consumer staples, healthcare, and utilities, encompassing companies providing the bare essentials, like food, medicine and electricity, that remain in demand even when the economy falters. S&P consumer staples .GSPS rose 2.9 percent since October 31, while health stocks .GSPA gained 0.9 percent and utilities .GSPU edged up by 0.1 percent.

In fact, utilities and consumer staples are the only groups to have experienced earnings multiple expansion this month, meaning their share gains have outpaced earnings growth expectations, while healthcare has held steady.

The worrisome leadership aside, bulls point to tame inflation, expectations for additional Federal Reserve rate cuts, and compelling valuations against competing assets, notably bonds, as strong reasons to back equities.

The earnings yield on stocks is near 7.0 percent, compared with a 10-year U.S. Treasury note yield below 4 percent.

That is helping to attracting foreign buyers for stocks, as the Abu Dhabi deal with Citigroup illustrates. Fund flows tracking group EPFR Global noted that U.S. equities attracted $7 billion of new money this week, the only major regional equity group to attract inflows.

"Foreigners are looking and saying, 'Hmm, look at what we can buy cheap, look at where the dollar is, look at what we can do,'" said Neil Hennessy, president of Hennessy Funds in Novato, California.

(Additional reporting by Doris Frankel and Herb Lash)

(Reporting by Jennifer Coogan; editing by Clive Mckeef)