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U.S. Stocks Retreat Following Worst Week Since 2012

By Whitney Kisling and Lu Wang
January 27, 2014 4:36 PM EST 28 Comments

U.S. stocks fell, following the worst week since 2012 for benchmark indexes, as concern over Federal Reserve plans to cut stimulus and an economic slowdown in China tempered gains in industrial shares.

Visa Inc., Microsoft Corp. and Goldman Sachs Group Inc. slumped more than 1.7 percent, leading declines among large companies. Google Inc. and Facebook Inc. paced losses in technology stocks. Caterpillar Inc. (CAT) jumped 5.9 percent after announcing a stock buyback and forecasting earnings above analysts’ estimates amid demand for construction equipment.

The Standard & Poor’s 500 Index slipped 0.5 percent to 1,781.56 at 4 p.m. in New York after tumbling 2.6 percent last week. The Dow Jones Industrial Average lost 41.23 points, or 0.3 percent, to 15,837.88. Both gauges closed at the lowest levels since mid-December. About 8 billion shares changed hands on U.S. exchanges, 30 percent more than the three-month average.

“I don’t think the emerging market story has played out yet,” Wayne Lin, a portfolio manager at Baltimore-based Legg Mason Inc., which oversees $680 billion, said in a phone interview. “The big question is, is it the beginning of another macro event, or is it just people worried about losing their profits and selling off? People are evaluating whether or not markets are as safe and steady as they have been.”

The S&P 500 (SPX) sank the most since June 2012 last week as a sell-off in developing-nation currencies spurred concern global markets will become more volatile. The decline pushed the index below its average price in the past 50 days for the first time since October. The threshold is currently about 1,813. The S&P 500 today extended its 2014 retreat to 3.6 percent. The Dow is down 4.5 percent for the year.

Stimulus Cuts

Emerging-market stocks are off to the worst start to a year since 2009 and currencies from Turkey to South Korea have tumbled amid signs growth is slowing in China and as the Fed prepares to review further stimulus cuts this week.

The central bank, which starts a two-day meeting tomorrow, decided at its December gathering to begin cutting its monthly bond purchases by $10 billion to $75 billion.

The meeting is the last for Chairman Ben S. Bernanke, as Janet Yellen takes over starting Feb. 1. The Fed stimulus has helped fuel a five-year bull market that has pushed the S&P 500 higher by 165 percent.

Fed officials have been scrutinizing economic data to determine the timing and pace of any reductions to their stimulus. A Commerce Department report today showed that sales of new homes in the U.S. fell more than forecast in December, ending the industry’s best year since 2008 on a sour note.

Earnings Season

Eight companies in the S&P 500 were scheduled to report their financial results today. Of the 125 companies in the benchmark that posted earnings so far this season, 74 percent have beaten analysts’ estimates for profit and 68 percent have exceeded projections for sales, according to data compiled by Bloomberg.

Companies in the S&P 500 probably increased their earnings per share by 6.6 percent in the fourth quarter of 2013 and their revenue by 2.6 percent, analysts’ estimates compiled by Bloomberg show.

The Chicago Board Options Exchange Volatility Index slid 4 percent to 17.42 today, retreating from the highest level since October. The gauge of S&P 500 options known as the VIX surged 46 percent last week, its biggest gain since May 2010.

“The market is volatile and it just feels like a lot of scared buyers are out there,” Sandy Villere III, a New Orleans-based fund manager at Villere & Co., said in a phone interview. His firm oversees $3.2 billion. “We don’t see a major pullback. Earnings are largely pretty good and the U.S. is generally healthy.”

Villere said his firm is considering buying some technology, industry and retailer shares after raising cash to a maximum 15 percent at some of the funds at the end of last year.

Industry Movers

Seven out of 10 S&P 500 industry groups declined today as technology and health-care companies fell the most, sliding at least 0.8 percent as a group. A gauge of industrial shares added 0.2 percent for the best performance.

Visa, the world’s biggest bank-card network, declined 2.3 percent to $216.22. Microsoft, the largest software developer, slipped 2.1 percent to $36.03. Goldman Sachs lost 1.8 percent to $164.69.

Liberty Global (LMCA) Plc slipped 2.2 percent to $81.42 after the company controlled by billionaire John Malone agreed to take over Dutch broadband provider Ziggo NV for 4.9 billion euros ($6.7 billion). Liberty will combine Ziggo’s 2.7 million customers with its UPC cable unit as it competes with Dutch carrier Royal KPN NV.

Technology Shares

The Nasdaq-100 Index declined 0.9 percent, trimming a loss of 1.7 percent earlier. Google slipped 2 percent to $1,101.23 while Facebook, the world’s largest social network, dropped 1.7 percent to $53.55. Both companies are scheduled to report results later this week.

Xerox Corp. dropped 5.6 percent to $10.61. The photocopier pioneer was cut to market perform from outperform at BMO Capital Markets by equity analyst Keith Bachman, who said the stock’s valuation already reflected the company’s improved services and technology mix.

Apple Inc. (AAPL), the most-valuable company in the world, climbed 0.8 percent to $550.50 in regular trading before the company reported fiscal first-quarter results. The shares sank 6.3 percent in extended trading at 4:35 p.m. in New York after the company’s second-quarter revenue forecast of $42 billion to $44 billion trailed the average analyst estimate of $46.10 billion.

Caterpillar rallied 5.9 percent to $91.29 after saying it will spend $10 billion buying back shares. The company also reported earnings of $1.54 a share, exceeding the average analyst estimate of $1.27, data compiled by Bloomberg show.

Construction equipment demand is helping Caterpillar to limit the damage from the slump in orders from mining companies that followed a decline in commodity prices.

Merck & Co. advanced 1.1 percent to $52.53. The second-largest U.S. pharmaceuticals company was raised to overweight, an equivalent of buy, from underweight by Morgan Stanley on expectations that cancer drugs will help Merck boost sales.

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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