Equities outlook shifts as bear market deepens

NEW YORK (Reuters) - The deep slide in U.S. stocks this week to 12-year lows along with lowered economic expectations has sapped investor sentiment and led many on Wall Street to wonder how low equity markets can go.

U.S. stocks are now down from their all-time peaks in October 2007 by more than 55 percent, eclipsed only by an almost 80 percent plunge after the crash of 1929.

About $11.1 trillion in market wealth as measured by the DJ Wilshire 5000 index .DWCF, which encompasses most U.S. public companies, has been wiped out during the plunge.

Many investors now believe that stocks will take longer to recover than previously expected, a shift from the optimism at the end of 2008 when many thought the worst had passed, a view held then by BlackRock Inc's Bob Doll, among others.

"We have broken down and therefore the repair process to create a bottom and to create a foundation sort of has to start over again," Doll, global chief investment officer for equities at BlackRock, told Reuters earlier this week.

Doll, like many on Wall Street, had believed the lows of November would mark the bear market's trough, because of the depth of the sell-off and the valuations stocks had reached.

Profit expectations over the next 12 months for companies in the Standard & Poor's 500 Index .SPX traded at 10.9 as of Thursday, below a historical price-to-earnings range of 12 to 15, according to the latest Thomson Reuters report.

'L-SHAPED' RECOVERY OUTLOOK DAMPENS SENTIMENT

But with recessions raging as manufacturing and exports plummet in developed economies across the world, many now say an economic recovery will be shaped more like an "L" than a "U," even with the enormous fiscal stimulus that governments plan.

Employers axed 651,000 jobs in February, data showed on Friday, a sign that profitable firms are bracing for a more difficult economy by cutting payrolls, said Mohamed El-Erian, chief executive of bond giant Pacific Investment Management Co, or Pimco.

El-Erian told Reuters Television that the economic outlook is getting worse, not better, and that the unemployment report cannot be viewed as a lagging indicator as tradition holds.

"What today's number tells you is forward-looking. It tells you that even the profitable firms are shedding labor today in order to position themselves for a more difficult outcome," he said.

The dividend payout for companies in the S&P 500 may drop 20 percent in 2009, analyst Thomas Lee of JPMorgan Securities wrote in a note to clients, adding that the pace of dividend cuts was four times faster than a year ago.

Jim Rogers, who co-founded the Quantum Fund with George Soros in 1970, told Reuters earlier in the week that more pain was in store for stock markets.

"I don't think the bottom is here, maybe 'a' bottom, but not 'the' bottom. The economy is going to get worse. You can't have a good stock market without a good economy," Rogers said.

While stocks generally start to rally about six months before economies pull out of recession, Rogers doubts U.S. stimulus plans will boost the economy for long.

"Maybe you'll have some kind of rally in the economy with all this money that's going to get poured into it, but it's not going to last," he said.

"Unless the economy is on a sound and rising basis for a few years, you're not going to have a good stock market."

GDP ESTIMATES FOR FIRST QUARTER KNOCKED LOWER

Driving stocks lower are dismal data and economic forecasts that are taking a dimmer view than just a few months ago.

Goldman Sachs said this week the U.S. economy is deteriorating more severely than previously anticipated and will shrink at an annual rate of 7 percent this quarter. The contraction may be as much as 10 percent, Deutsche Bank said.

Friday's jobs report adjusted December's payrolls losses to 681,000, the deepest since October 1949, and February's number may be revised lower, too, said Nigel Gault, chief U.S. economist at Global Insight in Lexington, Massachusetts.

"It's a strong possibility we'll come back next month and find that we actually lost more in February than we're being told right now," Gault said.

The raft of gloomy data recently led insurer Aviva (AV.L)> to cut its outlook for U.S. gross domestic product in 2009 by a full percentage point to negative 3.2 percent, said Ross Junge, senior vice president of portfolio management at Aviva.

"We do see a modest recovery in 2010, but overall more of a very L-shaped recovery. The reason for that is we see the housing crisis continues," said Junge, who oversees about $40 billion in fixed-income assets.

"Things have become a little more gloomy (than) projected a couple months ago," Junge said.

John Taylor, chairman and CIO at FX Concepts, the world's largest currency hedge fund, believes the S&P 500 will fall to 500 or 550 and that for a long-term investor U.S. stocks are not oversold.

"We are definitely not at the bottom. Stocks may be at their two- to three-week bottom, but they're definitely going lower," said Taylor, who oversees about $14 billion in assets.

"The problem is that valuations are still going down. The earnings are going down and the dividends are being cut. So it looks like stocks are going to look like they're not worth that much," Taylor told Reuters.

(Additional reporting by Daniel Burns, Jennifer Ablan and Gertrude Chavez-Dreyfuss; Editing by Jonathan Oatis)