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U.S. Stocks Drop on Fed Bets Amid Budget Talks, Data

By Nick Taborek and Callie Bost
December 10, 2013 4:31 PM EST 10 Comments
Traders Work on the Floor of the New York Stock Exchange
Traders Work on the Floor of the New York Stock Exchange

U.S. stocks fell, after the Standard & Poor’s 500 Index reached a record, as investors weighed federal budget negotiations and better-than-estimated economic data to gauge the timing of any Federal Reserve stimulus cuts.

General Motors Co. (GM) slipped 1.2 percent as the government sold its stake and the automaker named its next leader. Ares Capital Corp. dropped 3 percent after saying it will sell shares to help reduce debt. Twitter Inc. rallied for the fifth time in six sessions, adding 5.8 percent to extend a record. Goldman Sachs Group Inc. added 1.2 percent as federal agencies approved the Volcker rule to limit proprietary trading.

The S&P 500 dropped 0.3 percent to 1,802.62 at 4 p.m. in New York. The gauge closed at a record 1,808.37 yesterday. The Dow Jones Industrial Average fell 52.40 points, or 0.3 percent, to 15,973.13. About 5.8 billion shares changed hands on U.S. exchanges, 5 percent below the three-month average.

“In front of the prospect of a budget deal and the Fed’s meeting next week, there’s a little bit of nervousness,” Dan Greenhaus, chief global strategist with BTIG LLC in New York, said in a phone interview. “You’re inclined to trade sideways and I think that’s what’s happening. We had a very strong day on Friday, so some digestion of a more than 1 percent move up is not out of the question.”

Job Openings

The benchmark equity gauge advanced 0.2 percent yesterday to a record, extending a 1.1 percent gain on Dec. 6 after better-than-forecast jobs growth boosted confidence in the world’s largest economy. Improving data had spurred concern that the Fed will reduce its stimulus sooner than expected.

Data today showed job openings in the U.S. climbed to a five-year high in October, indicating employers were confident about demand even as Washington’s budget impasse shuttered parts of the federal government. Another report showed wholesale trade sales and inventories increased more than economists forecast.

Some 12 out of 35 economists surveyed by Bloomberg on Dec. 6 predicted that Fed policy makers will begin to slow the asset-buying program at their Dec. 17-18 meeting. Nine said the central bank will buy fewer bonds from its January meeting and the remaining 14 forecast that tapering will start in March.

Budget Talks

Fed officials will be watching the outcome of U.S. budget talks, as Congressional negotiators have until Dec. 13 to reach a deal to trim automatic spending cuts and break a three-year stretch of failed fiscal talks in Washington.

Representative Steny Hoyer, the No. 2 House Democrat, said in an interview on CNBC today that he doesn’t like what he’s heard about the budget deal. Senate Budget Committee Chairwoman Patty Murray, Democrat from Washington, said negotiators are “getting close,” and that the remaining issues will be resolved.

“There was a little more hope yesterday on that front, that we could have something positive out of D.C.,” Richard Sichel, chief investment officer at Philadelphia Trust Co., said in a telephone interview. He helps oversee $1.9 billion. “Any doubt that surfaces on that could discourage investors.”

The 29-member budget conference panel was set up by the legislation that ended the 16-day government shutdown in October.

Equity Valuations

The S&P 500 has rallied 26 percent in 2013, challenging 2003 for the best annual gain in 15 years. The gauge trades at 16.3 times the projected earnings of its constituents, up from a price-earnings ratio of 13.7 at the start of the year. The index has risen every December since 2007, according to data compiled by Bloomberg.

Barclays Plc told investors to reduce holdings of U.S. stocks in 2014 as less attractive valuations may end their leadership in equities. Earnings growth in the U.S. will lag behind other regions next year, the bank said.

“You have to be a bit selective as the market gets more narrow and stocks get more expensive,” Patrick Spencer, London-based head of U.S. equity sales at Robert W. Baird & Co., said in an interview. “Sentiment overall is still bullish. December historically has always been a good month for markets.”

In China, a report from the National Bureau of Statistics showed that industrial production in the world’s second-largest economy rose 10 percent in November from a year earlier. That fell short of the median economist projection for growth of 10.1 percent. Output increased 10.3 percent in October.

Five U.S. agencies today approved the Volcker rule, which aims to reduce the chances that banks will put federally insured depositors’ money at risk by largely banning proprietary trading.

Volcker Rule

New York-based banks JPMorgan Chase & Co. (JPM), Goldman Sachs and their industry allies have contested the proposed rule for more than three years.

Wall Street’s lobbying efforts paid off in easing some provisions of the rule. Regulators granted a broader exemption for banks’ market-making desks, on the condition that traders aren’t paid in a way that rewards proprietary trading.

Regulators said the final version imposed stricter restrictions on hedging, providing banks less leeway for classifying bets as broad hedges for other risks.

Goldman Sachs added 1.2 percent to $169.73 for the biggest gain in the Dow. JPMorgan added 0.3 percent to $56.70.

The Chicago Board Options Exchange Volatility Index (VIX), the gauge of S&P 500 (SPX) options known as the VIX, rose 3.1 percent to 13.91.

Eight of 10 main S&P 500 industries retreated today. Utility, consumer staple and telephone shares had the biggest declines. They were also three of the five worst performing groups of the year.

‘December Action’

“This is typical December action,” Bruce Bittles, chief investment strategist at RW Baird & Co., said by phone from Sarasota, Florida. His firm oversees $100 billion. “It’s caused by tax-related moves by investors. You get a lot of people selling areas of the market that underperformed for tax losses, and they match those with a little bit of selling in some of the winners.”

General Motors slid 1.2 percent to $40.40. The company named Mary Barra, an engineer whose career began on the factory floor, to succeed Dan Akerson as chief executive officer, making her the first female CEO in the global automotive industry.

The U.S. government yesterday sold its final shares of GM, freeing the automaker from taxpayer ownership almost five years after receiving government aid.

Analogic (ALOG) Corp. slumped 6.8 percent to $86.33. The medical and airport-security device maker reported sales of $110.1 million for the three months ended Oct. 31, less than the $131.5 million average of two estimates compiled by Bloomberg. The shares didn’t trade in Europe today.

Starbucks Sales

Ares Capital dropped 3 percent to $17.75. The investment-management company, which currently has 281.2 million shares outstanding, said it will sell 14.3 million shares and use the proceeds to reduce debt.

Starbucks Corp. (SBUX) fell 3 percent to $77.38. The world’s largest coffee-shop operator may see slowing growth in same-store sales in its fiscal first quarter, ITG Investment Research Inc. analyst Steve West said in a note.

Pep Boys-Manny, Moe & Jack fell 7.6 percent to $12.39. The auto-parts retailer reported third-quarter profit below analysts’ estimates as same-store sales fell 2.8 percent.

AutoZone Inc. (AZO) rose 3.2 percent to a record $471.86. The company reported first-quarter earnings of $6.29 per share, beating analysts’ average estimate of $6.27 per share, and a 0.9 percent increase in sales at stores open at least 13 months.

Drugs Deal

CVS Caremark Corp. rose 1.9 percent to $67.99 and Cardinal Health Inc. climbed 3 percent to $66.22. The two companies are forming a joint venture to negotiate contracts for generic drugs.

Twitter gained 5.8 percent to $51.99, almost double its debut price of $26 on Nov. 6. The short messaging service has rallied 25 percent this month.

Broadcom Corp. (BRCM) advanced 2.3 percent to $28.51. The maker of communications chips used in Apple Inc.’s iPhone and iPad said revenue in the current period will be higher than it had originally anticipated on improving networking revenue.

Rambus Inc. jumped 12 percent to $9.58 after settling a patent dispute. Micron Technology Inc. agreed to pay $280 million in the next seven years for the right to use any of Rambus’s patents for the manufacture of integrated-circuit products, according to a joint statement issued after the close of trading yesterday.

Newmont Mining Corp. rose 2.5 percent to $24.18. Gold gained the most since mid-October as the dollar weakened. Newmont is the largest-U.S. producer of the precious metal.

To contact the reporters on this story: Nick Taborek in New York at ntaborek@bloomberg.net; Callie Bost in New York at cbost2@bloomberg.net

To contact the editor responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net

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