With global equities in the gutter over the last 12 months, the majority of indices are now selling at the same price level compared to 1994. That applies to both major and emerging market stock indexes where investors have ruthlessly pounded equities in the wake of massive credit related losses, bank failures and the worst economic recession since 1981-82.

In 2008, global stocks posted their worst calendar year return since the advent of the MSCI World Index in 1969. U.S. stocks logged their worst year since 1931.

Over the last 12 months the MSCI World Index has collapsed 43% while the MSCI Emerging Markets Index – the best performing global benchmark since 1999 – has tanked 53%.

Stocks are Historically Cheap

According to MSCI Barra, global stock markets are now trading at their lowest valuations in more than fifteen years.

The MSCI World Index trades at just 9 times trailing earnings and the MSCI Emerging Markets Index at 8 times trailing earnings. At their peak in October 2007 these and other indices sold for more than 18 times trailing earnings – a sizable 55% premium to current price levels.

Dividend yields, a key measure of relative values, are also historically high at 4% for the MSCI Barra World Index – more than the entire U.S. government bond yield curve.

Some regions, including Europe, now yield 5.6%, or almost twice the yield available from ten-year German government bonds.

Statistics like these would normally entice even the most pessimistic investors back into stocks. After all, the best time to buy common stocks is when prices are depressed, investor sentiment is highly bearish and mutual fund flows are negative.

Yet time and again since 2007 professionals have entered the market at the wrong time, suffering additional losses as bear market rallies draw more investors.

The difference between previous bear markets, like 1981-82 or 1973-74 and this one is the nature of the crisis – a credit related deflation that typically jolts investors once every 75 years or so. There is no bear market worse than a credit bubble deflating, as evidenced by the scope and duration of cumulative losses inflicted from 1929 until mid-1932 in the United States during the Great Depression. This crisis might be just as bad, if not worse.

Stocks Not for the Long Haul?

With common stocks “On Sale” this is the best time in more than 27 years to buy stocks, right? Well, not so fast.

Prior to the 2007 subprime credit collapse, mutual fund marketing and sales brochures all touted the long-term merits of stock investing. That might have been true ten years ago when trailing long-term returns were impressive prior to the market peak of March 2000. Yet an investor who bought U.S. or foreign equities as far back as 1995 is still sitting on losses. Worse, investors who purchased the S&P 500 Index or the MSCI World Index just prior to the dot.com crash are swimming in even bigger losses almost ten years later.

Since 1973, the MSCI World Index has posted a cumulative loss when adjusted for rising inflation.

The crash of 2008 cemented the long-term damage done to stock performance.

Since 1999, the MSCI World Index has lost an average annualized 3% per annum while the MSCI USA Index has declined 4.2% per year. Throw in inflation averaging about 3.5% per annum over the same period and common stocks have failed to make any headwinds. It’s the same story but only worse for performance studies over the last three and five-year periods.

The MSCI World Index might yield 4% now but with corporate earnings clearly in a downtrend, more dividend cuts lie ahead. That’s especially true for financial services companies where another wave of write-downs continues as governments in the Western industrialized economies attempt to create “bad banks” to isolate non-performing and toxic assets plaguing bank balance sheets.

Are Emerging Market Banks Next?

If that’s not sobering enough, consider the possibilities of bank write-downs and even failures affecting the emerging markets. Asia, which already experienced its own economic depression in 1997-98, isn’t immune to the credit related problems pounding Western banks.

Cross border trade has literally fallen off a cliff since late 2008, with China also feeling the pinch as exports decline sharply. Combined with collapsing commodities prices since last July, big emerging markets like Brazil or Indonesia might be next on the hit list as banks come to terms with an extended depression in natural resource related earnings or loans and investments tied to this once lucrative sector.

Russia, a major commodity exporter, is already getting smashed as she rapidly depletes her foreign-exchange reserves to defend a plunging rouble.

Emerging market banks have started to bleed, especially in Eastern and Central Europe, including Russia. It’s only a matter of time until bank assets in Latin America and even Asia suffer losses – even if the scale of these expected losses isn’t as severe as those recorded elsewhere.

The Mother of Rallies has Not Arrived

The odds are high that the November 20 low for stocks was not the bottom in this bear market. Like previous rallies since early 2008, this one remains within the confines of a dangerous macroeconomic environment as deflation continues to purge household and institutional balance sheets. Domestic consumption has collapsed.

Central banks and governments have thrown an impressive chunk of money at this crisis, but to no avail – at least not yet. The primary trend remains down.

The good news is that Obama’s $900 billion dollar (or whatever the final sum is) fiscal spending package combined with another spending plan to follow in 2010 – will eventually arrest deflation as the economy begins to bottom. But I don’t think we’re there just yet.

I doubt government spending, courtesy of the taxpayer, will kill this credit crisis; yet, like FDR back in 1933 following the launch of his first New Deal, the stock market did bottom several months several months before in June 1932. By late 1936, the Dow had almost tripled from its June 1932 low.

It’s highly likely that Obama’s big spending plans will draw a similar response from stocks, possibly resulting in a 100%-plus gain for stocks or more in a short period of time starting in late 2009 or 2010. The bottom lies ahead.

Corporate earnings will remain below trend for the rest of 2009 and will not bottom for this cycle until 2010 when the brunt of global government spending finally hits the market and supports renewed consumption. Until then, valuations are almost meaningless as more companies report losses and cut dividends. Low price-to-earnings ratios and dividends should be viewed cautiously in this uncertain economic environment. Buyer beware...