The biggest weekly fall in the FTSE 100 since 1987 – and an intraday drop of more than 10 per cent yesterday alone. The biggest weekly slide in the MSCI World index since its inception in 1970. Shares in General Motors at their lowest level since 1950. Stock exchanges in Iceland, Russia, Austria, Indonesia, Romania and Ukraine all shut because of the severity of share price falls.

Extraordinary times become more extraordinary by the day – and the historical benchmarks by which they are judged move progressively further back in time. The post-millennial bear market that bottomed in 2003 has long since stopped seeming like an adequate analogy, with the sell-offs of 1987 and 1974 now taking its place. In darker moments, it is the truly ferocious bear markets of the 20th century that loom into view: Japanese equities in the early 1990s, or 1929 Wall Street, which were accompanied by peak-to-trough falls of 80 per cent and more.

The immediate conundrum for investors who have already watched the FTSE 100 tumble 41 per cent from last year’s top is that all the traditional signals that suggest shares are too cheap have been flashing for days, if not weeks – and yet the sell-off continues.

The most reliable sign has been the dividend/gilt yield crossover: the point at which the historic returns from dividends begin to exceed those from ten-year government bonds (now at 4.45 per cent), and the base off which shares might be expected to bounce.

Citigroup points out that European dividend yields and bonds crossed over two weeks ago. Given that measure includes the banking sector – where distress-level valuations mean historic yields are comfortably into double digits – it is more meaningful to strip out financial stocks. On that tighter definition, the crossover this week occurred in nonfinancial European shares, too – for the first time in 45 years.

Less comforting is the fact that, for UK equities, further falls of more than 10 per cent are required for that threshold to be breached.

Quarterly patterns are more encouraging. In the UK, shareholders have now sat through five consecutive three-month stretches of share price falls – a phenomenon experienced only once in the past 40 years – which gives hope that the FTSE 100 might end the year above its 4,902.5 level of September 30, however remote that prospect might seem at last night’s close.

At that level, the forward earnings multiple of the FTSE 100 has fallen to only eight times, its lowest level since 1987, indicating that the stock market has already priced in a one-third fall in corporate profits.

But history suggests that looking at forecast profits for only one year alone can be an unreliable yardstick. More testing is the earnings multiple measure to which Robert Shiller, the Yale Professor of Economics and author of Irrational Exuberance, has given his name. This uses average company earnings over the previous ten years, which produces a much higher multiple than for one-year price-earnings (p/e) ratios. For example, at the start of this week, the historic p/e for European shares was nine, but a heady 16 times on the Shiller scale. Under the dictum that extreme bear markets do not reach the bottom until the Shiller multiple is in single digits, there is still some way to fall.

The fundamental problem is that, with the banking system not working correctly, all the usual rules can be readily dismissed. The most direct consequence is that the stock market has lost its ability to value the banks – which historically account for a large slug of the FTSE 100. One symptom of that malfunction is highlighted by Citigroup: that the two banks most unscathed by the credit crunch – HSBC and Standard Chartered – now make up three quarters of the sector’s worth.

The longer-running dilemma is how to value assets in a world in which the banking shutdown has made credit a scarce commodity. The process of “deleveraging” – whereby consumers, companies, sectors and entire economies unwind the debt accumulated over decades – will take years to work through, and is likely to be felt on many different fronts.

Perhaps the most obvious is that businesses will retain a greater proportion of their earnings at the expense of dividend payments.

Conversely, capital preservation will also be the rule by which investors live. That means a preference for cash over equities, or, at the very least, classes of securities that rank higher than shares in a company’s capital structure.

So where to turn? For now, the harsh reality is that the “good” companies are being punished along with the “bad”.

On Thursday, for example, regulated utilities lost their traditional safe-haven status: the sector as a whole fell by 8 per cent, far more than the wider stock market. That also ran counter to the trend whereby defensive stocks perform well in the first few months after interest cuts. Of course, power generators are sensitive to oil price falls. Even so, such performance suggests that forced selling by institutional investors facing redemption on their funds is holding greater sway over share prices than fundamentals.

That implies that the only prudent option is to continue to favour companies with strong balance sheets and predictable earnings – large-cap telecoms carriers, tobacco, healthcare equipment and pharmaceuticals, and makers of household goods. Boring is still best. The buying of those sectors most prominently geared to recovery – the so-called consumer cyclicals, such as media and retailers – can wait for another day.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Calls grow for steep rate cut as services deteriorate
• Stagecoach shares fall 20% on rail warning
• UK broadcasters web TV 'limits competition'