Bloomberg News

U.S. Stocks Decline as Fed Refrains From Additional Stimulus

December 14, 2011

Dec. 13 (Bloomberg) -- U.S. stocks retreated, reversing an earlier advance for the Standard & Poor’s 500 Index, after Federal Reserve policy makers refrained from taking new actions to bolster growth at the world’s largest economy.

Nine out of 10 groups in the S&P 500 declined, led by companies most-dependent on economic growth. Sears Holdings Corp., Alcoa Inc. and Bank of America Corp. slumped at least 2.3 percent. Best Buy Co., the largest consumer-electronics retailer, tumbled 15 percent as discounts hurt gross margin. Amazon.com Inc. dropped 4.8 percent as Goldman Sachs Group Inc. said estimates for the biggest Internet retailer need to fall.

The S&P 500 slid 0.9 percent to 1,225.73 at 4 p.m. New York time, reversing a gain of 1.1 percent and falling to the lowest level since Nov. 29. The Dow Jones Industrial Average retreated 66.45 points, or 0.6 percent, to 11,954.94. The Russell 2000 Index of small companies lost 2.1 percent to 718.06.

“The disappointment was due to a minority expecting QE3,” Philip Orlando, the New York-based chief equity market strategist at Federated Investors Inc., said in a telephone interview, referring to a third-round of asset purchases or quantitative easing. His firm oversees about $355 billion. “We don’t think that’s warranted. The economy is accelerating. If the economy collapses or the threat of deflation becomes more apparent, then the Fed may change its mind.”

Stocks fell as the Fed said the U.S. economy is maintaining its expansion even as the global economy slows, while refraining from taking new actions to lower borrowing costs. Today’s statement reiterated the warning at the Fed’s two previous meetings that “strains in global financial markets continue to pose significant downside risks to the economic outlook.”

Operation Twist

The central bank said it would continue its exchange of $400 billion of short-term debt with long-term securities to lengthen the average maturity of its holdings, a move dubbed Operation Twist. The Fed also did not alter its policy of reinvesting its portfolio of maturing housing debt into agency mortgage-backed securities.

“Operation twist remains in effect but there was no mention of a QE3, or further coordinated action with the ECB, which may have disappointed investors,” Mark Bronzo, who helps manage $23.5 billion at Security Global Investors in Irvington, New York, said in an e-mail.

The Morgan Stanley Cyclical Index slumped 2.3 percent, while the Dow Jones Transportation Average declined 1.6 percent amid concern about global economic growth. The KBW Bank Index fell 1.6 percent as 22 of its 24 stocks retreated. Sears Holdings dropped 5.1 percent to $53.71. Alcoa erased 3.3 percent to $9.04. Bank of America decreased 2.4 percent to $5.32.

Dispute Settled

MBIA Inc. pared a rally of as much as 11 percent, rising 0.7 percent to $11.48. A settlement with Morgan Stanley ended credit-default swap guarantees on commercial-mortgage debt and the bank said it will withdraw from a lawsuit challenging the bond insurer’s 2009 restructuring. Morgan Stanley, which jumped 7.6 percent earlier today, lost 1.4 percent to $15.17.

A gauge of retailers in the S&P 500 dropped 2.7 percent as a group. Retail sales rose in November at the slowest pace in five months, indicating American consumers were trying to live within their means heading into the holiday shopping season as wages dropped.

Best Buy tumbled 15 percent, the most since 2002, to $23.73. The shares also had the biggest decline in the S&P 500. The retailer’s third-quarter profit declined more than analysts estimated, hurt by discounts to lure Black Friday shoppers.

‘Downward Revisions’

Amazon.com slumped 4.8 percent to $180.51, the lowest since Aug. 22. Goldman Sachs said 2012 estimates for the Internet retailer need “material downward revisions.” The firm resumed coverage of Amazon’s shares with a “neutral” recommendation.

Netflix Inc. dropped 4.2 percent to $72.11, reversing a rally of as much as 3.1 percent. Verizon Communications Inc., the second-largest U.S. phone company, hasn’t discussed making a bid for Netflix, according to two people with knowledge of the situation.

Yesterday, Netflix gained 6.2 percent after Deal Reporter, a trade publication, said that Verizon is considering an offer for the Los Gatos, California-based movie streaming service. Steve Swasey, a Netflix spokesman, and Torod Neptune, a spokesman for Verizon, declined to comment on the reports.

FactSet Research Systems Inc. erased 6.9 percent to $88.24. The provider of financial data to investment managers and banks fell the most since August after a decline in subscribers overshadowed a higher-than-estimated profit forecast.

Rising Sales

Urban Outfitters Inc. climbed 5.3 percent to $27.87 for the biggest increase in the S&P 500. The operator of about 400 namesake, Anthropologie and Free People clothing stores gained the most in more than a month after saying fourth-quarter retail sales are rising.

U.S. stocks can avoid the effects of Europe’s intensifying sovereign-debt crisis, leading ABN Amro Private Banking to remain positive on the world’s largest economy, according to Chief Investment Officer Didier Duret.

The bank that manages 164 billion euros ($217 billion) for clients cut its overall allocation to equities to an “underweight” stance on Nov. 11, taking advantage of its positive stance from the middle of August. The wealth manager has maintained its “overweight” allocation in U.S. stocks, citing the prospects for corporate profit growth and faster job creation in the country.

“The job machine is probably back in the U.S.,” Duret said in a phone interview from Amsterdam yesterday. “There is more resilience in the U.S. market from an earnings perspective. In Europe, you are seeing earnings being downgraded, but in the U.S. this is not the case.”

--With assistance from Adam Haigh in London. Editors: Jeff Sutherland, Michael P. Regan

To contact the reporter on this story: Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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