(Bloomberg) -- The last time the Standard & Poor's 500 Index was at least 10 percent below its previous high, in 2003, the world's biggest stock investors were bullish.
Not this time. Institutions handling $1.5 trillion, including Baring Asset Management's Andrew Cole, ABN Amro Asset Management's Joost van Leenders and MFS Investment Management's James Swanson, are holding or selling. They say stocks are riskier today than they were during that last correction in 2003, even though valuations are half as much.
``It's a much more dangerous game today,'' said Cole, 44, a fund manager who helps invest $48 billion at Baring in London. ``2008 is going to be a year of preservation of capital. We've got a lot of cash and we're not frightened to say so.''
Cole, whose firm favored shares over bonds or cash in 2003, said in an interview he's ``underweight'' equities this year because evidence of a U.S. recession is mounting. January's decline in the S&P 500, the benchmark for American equities, marked the worst start in the index's history.
The Federal Reserve's three interest-rate cuts since September haven't encouraged stock investors about the prospects for the economy. Equities are the cheapest relative to bonds since 1974, and still investors are shifting funds to fixed- income.
Steepest Drop
Stocks got even less expensive as the MSCI World Index dropped 3 percent yesterday, its biggest decline since 2002. The global benchmark slipped 1.1 percent today, its sixth straight decline and the longest stretch of losses since the period ended July 18, 2006.
Benchmark indexes from Hong Kong to London and Brazil retreated yesterday as concern grew that a U.S. recession will weaken global growth. Japan's Nikkei 225 Stock Average dropped today by the most since September 2001, and Australia's All Ordinaries Index tumbled the most since October 1989. In Hong Kong, the Hang Seng Index was headed for its biggest two-day slump in a decade.
Investors pulled money from U.S. stock funds every month between May and November, the longest streak this decade, according to Investment Company Institute, which compiles data from 4,744 equity funds with $6.6 trillion in assets.
Net inflows to fixed-income funds in 2007 were the biggest since the start of the U.S. bull market in 2002, according to data from ICI, the Washington-based trade group for the mutual- fund industry.
``What we've been telling people to do is, `Face reality and take action.''' said David Darst, the New York-based chief investment strategist for Morgan Stanley's private banking unit, which oversees $700 billion.
Recession Forecasts
Last month, Darst recommended clients raise their cash holdings to 16 percent of assets. He told them to move money from equities to hedge funds that use futures to bet on currencies, interest rates and commodities.
ABN Amro Asset's van Leenders, 38, the firm's investment strategist, said he's daunted as earnings fall and predictions from Morgan Stanley, Goldman Sachs Group Inc., and Merrill Lynch & Co. increase investors' conviction that the country is sliding into a recession.
Profit for S&P 500 members may have tumbled an average of 17 percent in the fourth quarter, according to Bloomberg data. The 2.5 percent drop in the third was the first quarterly decline since 2002.
End of Expansion
A jump in the jobless rate in December signaled that the longest expansion in consumer spending on record will end in the first quarter, Goldman said. The number of Americans who fell behind on mortgage payments rose to a 20-year high in the third quarter and home prices probably fell last year for the first time since the Great Depression.
Economic growth will slow to 1.1 percent in the first quarter, according to the median estimate of 65 economists surveyed by Bloomberg. In 2003, the U.S. grew at an annual rate of 2.5 percent while profits rose 17.4 percent a quarter, on average.
A correction is any time a stock index declines 10 percent or more from peak to trough. The latest for the S&P 500 was reached Nov. 26, when it fell 10 percent from its record in October.
Prior to that, the 15 percent drop in the index between November 2002 and March 2003 was the sixth correction in three years. Those were spurred by the collapse of the technology bubble, the terrorist attacks on Sept. 11, 2001, a recession in 2001 and the dissolution of Enron Corp.
`Entering Recession'
The S&P 500 rebounded 39 percent between its 2003 low and the end of the year, marking the beginning of a five-year bull market.
``The macro picture right now is much weaker,'' said van Leenders, whose Amsterdam-based firm has $309 billion in assets. ``Then we were recovering from a recession, now we are entering one.''
ABN Amro Asset lowered its allocation to equities last quarter by raising cash and buying government and investment- grade corporate debt, he said. Swanson, the chief investment strategist at Boston-based MFS, sold a third of the shares he owned at the end of the year to boost his holdings in U.S. government bonds.
The S&P 500 fell 9.8 percent in the first 13 trading days of this year for the worst start since the index's inception in 1957. Stocks will drop further as the economy forces more homeowners into default and banks' losses on investments tied to subprime mortgages double to as much as $200 billion, Swanson said.
Benchmarks Drop
MSCI's world index slid 1.1 percent to 1,380.60 as of 3:03 p.m. in Tokyo, extending its decline from an Oct. 31 record to 18 percent. Japan's Nikkei 225 dropped 5.7 percent, and Australia's S&P/ASX 200 lost 7.1 percent. Hong Kong's Hang Seng plunged as much as 8.2 percent. India's Sensex index tumbled 12 percent when trading resumed after a halt to avoid breaching limits.
Yesterday, London's FTSE 100 Index dropped 5.5 percent for the steepest loss since September 2001. Brazil's Bovespa index plunged 6.6 percent, the biggest retreat in almost a year.
``Everything is being painted with a `dump-it-now' brush,'' Swanson, 58, said in an interview from Omaha, Nebraska. ``Seeing those red numbers on stock after stock after stock, it changes the psychology. It's very easy to give in to the doom of `Man, this is really now a recession and bear market and it's never going to get better.'''
Banks Extend Decline
Banks and brokerages in the S&P 500, last year's worst- performing industry with a 21 percent decline, have dropped another 13 percent in 2008. Telephone companies, energy producers and computer makers have fallen more than 12 percent since the start of this year.
New York-based Merrill, the biggest U.S. brokerage, had a record loss last week after writing down the value of its subprime-infected assets by $16.7 billion.
The stock-market slump hasn't been limited to the U.S. Benchmarks in more than two dozen countries including Japan, Sweden and Peru have plunged at least 20 percent from their peaks in the past six months, marking the start of so-called bear markets. This month alone, global stocks have lost more than $5 trillion in market capitalization, Bloomberg data show.
Stuart Fraser, who helps manage $42 billion at Brewin Dolphin Securities Ltd. in London, said he purchased inflation- linked government debt because ``central banks will be more concerned about rescuing the economy than worrying about inflation.''
Fraser, 61, also bought futures contracts and exchange- traded funds that track wheat and soybean prices. Wheat reached a record $10.095 a bushel in December and has doubled in the past year. Soybeans set an all-time high of $13.415 a bushel this month after surging 78 percent in 2007.
Long Volatility
Ashburton Ltd.'s Peter Lucas bought futures on the so-called VIX, the Chicago Board Options Exchange Volatility Index that tracks the price of S&P 500 options. The gauge of stock market price swings almost doubled in 2007.
``Whatever happens this year, volatility will remain elevated,'' said Lucas, 42, who oversees $1.7 billion as chief investment officer at Ashburton in Jersey, Channel Islands. ``Being long volatility is a smart way of hedging equity risk.''
Relative to earnings, stocks are about half as expensive as they were in 2003. Companies in the S&P 500 are valued at an average 17.5 times reported profit, compared with 33 times at the start of 2003, data compiled by Bloomberg show.
