U.S. Stocks Fall, Posting First Back-to-Back Losses Since July
By Rita Nazareth – October 3, 2009 08:00 EDT
Oct. 3 (Bloomberg) — U.S. stocks fell, giving the Standard & Poor’s 500 Index its first two-week decline since July, after manufacturing expanded less than anticipated and unemployment climbed to a 26-year high, spurring concern the economy is rebounding slower than forecast.
General Electric Co. and JPMorgan Chase & Co. lost at least 4 percent on speculation the market’s seven-month rally outpaced prospects for an earnings recovery. U.S. Steel Corp. and Chevron Corp. led commodity producers lower as the International Monetary Fund predicted growth next year will be restrained amid rising U.S. unemployment and the waning effects of President Barack Obama’s $787 billion stimulus program.
The S&P 500 retreated 1.8 percent to 1,025.21 this week. The Dow Jones Industrial Average slumped 177.52 points, or 1.8 percent, to 9,487.67. The Russell 2000 Index of small companies dropped 3.1 percent to 580.20.
“It’s going to be a slow economic recovery,” said John Carey, a Boston-based money manager at Pioneer Investments, which oversees more than $200 billion worldwide. “People are now focusing more on fundamentals and getting concerned that share prices may have gotten ahead of themselves in the near-term.”
The U.S. equity benchmark has risen 52 percent from a 12- year low in March, sending its price-to- earnings ratio to the highest level since 2004 last month. The measure is valued at about 19 times its companies’ reported operating profits, according to Bloomberg data.
Economically sensitive stocks led the losses in the Dow average after the Institute for Supply Management’s index showed that U.S. manufacturing expanded last month at a slower pace than anticipated by economists. Separate reports showed 551,000 Americans filed claims for unemployment benefits last week, more than expected, and the unemployment rate rose to a 26-year high of 9.8 percent.
“The U.S. economy is showing increasing signs of stabilization,” the IMF said in its World Economic Outlook. “Combined with the impact of rising unemployment, the temporary nature of the fiscal stimulus, and subdued growth in trading partner economies, growth will remain sluggish,” the fund said.
Industrial shares slid the most among 10 industries in the S&P 500, falling 3.5 percent. GE, the world’s biggest maker of locomotives and medical imaging equipment, lost 6.2 percent to $15.36. JPMorgan, the second-largest U.S. bank, led financial companies lower, retreating 4 percent to $41.86.
Raw-material producers lost 2.9 percent for the second- biggest decline among 10 S&P 500 groups. Copper fell to the lowest price in two months as the dollar strengthened and U.S. job losses signaled slowing growth and contracting demand for the metal used in pipes and wires. Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, lost 1.2 percent to $65.86.
U.S. Steel fell 13 percent to $40.75, and AK Steel Holding Corp. declined 13 percent to $18.05, the steepest losses among raw-material producers. The U.S. steel industry was cut to “neutral” from “attractive” at Goldman Sachs Group Inc., which cited the likelihood of lower prices.
Chevron lost 3.6 percent to $68.14, leading energy stocks to the third-steepest decline among 10 S&P 500 industries, as concern demand will be slow to rebound overshadowed oil’s biggest weekly gain since Aug. 21.
Xerox tumbled 19 percent, the steepest decline in the S&P 500, to $7.32. The world’s largest maker of high-speed color printers agreed to buy Affiliated Computer Services Inc. in a deal valued at about $5.8 billion, making its biggest purchase as it shifts to technology services after sales of its printing equipment dropped. The deal will increase Xerox’s debt while more than doubling its workforce.
‘Need to Be Cautious’
“Investors need to be cautious about getting into this market,” said Tyler Vernon, a fund manager at Biltmore Capital Advisors, which oversees $500 million in Princeton, New Jersey. “Stocks have been discounting a fairly robust recovery, and the truth of the matter is that it’s going to be very tough.”
The S&P 500 jumped 15 percent in the July-to-September period to give it a two-quarter advance of 32 percent, the biggest since a 39 percent surge in the first half of 1975. The Dow also rose 15 percent in the third quarter and gained 28 percent in April through September, its steepest two-quarter advance since 1987.
For the second quarter, 72.3 percent of S&P 500 companies surpassed the average analyst estimate for profit, matching the highest proportion in Bloomberg data going back to 1993.
Better Profit Margins
Third-quarter earnings for companies in the S&P 500 may top analysts’ estimates because cost reductions are allowing them to improve margins, Deutsche Bank AG’s chief U.S. equity strategist Binky Chadha told Bloomberg Television on Sept. 30. Profits for S&P 500 companies are expected to drop 23 percent in the third quarter and rebound 63 percent in the last three months of 2009, ending a nine-period streak of declining earnings.
“We’re in a two- to three-year bull market,” said David Darst, the New York-based chief investment strategist at Morgan Stanley Smith Barney, which has $1.4 trillion in client assets. “The feeling is that profit margins are going to expand and go back near the old all-time peak.”
Gannett Co. climbed 26 percent to $11.84 for the steepest advance in the S&P 500. The largest U.S. newspaper publisher forecast third-quarter profit that exceeded analysts’ estimates and announced a plan to offer $400 million of senior notes.
Alcoa Inc. is scheduled to become the first company in the Dow average to report third-quarter results on Oct. 7. Monsanto Co., Costco Wholesale Corp., Marriott International Inc. and PepsiCo Inc. are among eight companies in the S&P 500 scheduled to release earnings next week.
Service industries in the U.S., the largest share of the economy, stabilized in September after contracting for almost a year, economists forecast a report next week will show. The Institute for Supply Management’s index of non-manufacturing businesses, which reflects almost 90 percent of the economy, rose to 50, according to the median forecast in a Bloomberg News survey.