By Elizabeth Stanton and Deirdre Bolton

Aug. 14 (Bloomberg) — U.S. stocks are “dramatically overpriced” because the fallout from the financial crisis will continue to hurt consumer spending, said David Tice, Federated Investors Inc.’s chief portfolio strategist for bear markets.

The Standard & Poor’s 500 Index has climbed 50 percent from a 12-year low on March 9 on speculation the economy is recovering from the worst contraction since the Great Depression. The rally pushed the index’s price relative to trailing 12-month operating earnings to 18.65, the most expensive since December 2004, according to weekly data compiled by Bloomberg.

“I’d love for prosperity to return, unfortunately I think you need to be realistic and it takes time to work off these excesses” from a bubble in credit markets, Tice said in an interview with Bloomberg Television.

Tice, who predicts that the S&P 500 will eventually slump to 400 points, said he would add to short positions should the rally continue. The S&P 500 rose to a 10-month high of 1,012.73 yesterday. The main benchmark for American equities hasn’t closed below 400 since 1992.

Prudent Bear

“This rally was not unexpected,” Tice said. “After a big decline like we had, it’s not unexpected to have a big rally.”

The S&P 500 fell 57 percent from a record in October 2007 through March 9 on global financial company writedowns and losses from the collapse of the subprime mortgage market that reached $1.6 trillion. Tice said he’s the most confident ever that the stocks will fall beneath their March lows. A drop to 400, a 61 percent plunge from yesterday’s close, is likely within a year, he said.

The Federated Prudent Bear Fund that Tice founded returned 27 percent last year as the S&P 500 plunged 38 percent, the most since 1937.

Investor sentiment improved around the globe this month, turning bears into bulls in five of the world’s biggest stock markets as earnings and economic data topped estimates, according to the Bloomberg Professional Confidence Survey. Optimism on U.S. equities climbed the most since April and was within 1 point of reaching 50, the level that shows participants expect prices to rise in the next six months.

Predictions for an economic recovery led by a rebound in consumer spending are unrealistic because falling real estate prices have destroyed wealth, Tice said.

“The consumer has had a diminution of net worth like we’ve never seen,” he said. “That’s going to impair spending.”

Tice said he favors natural resources, especially precious metals, as a hedge against declines in the value of the dollar. The U.S. currency is likely to lose value as a result of deficit spending by the federal government aimed at stimulating the economy, he said.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: August 14, 2009 09:30 EDT

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