Bloomberg News

U.S. Stocks Retreat as Jobs Growth Trails Forecasts

July 06, 2012

U.S. Stocks Retreat as Employment Growth Trails Forecasts

Private employment, which excludes government agencies, increased 84,000 in June, the weakest in 10 months. Photographer: Richard Drew/AP Photo

U.S. stocks declined, erasing a weekly gain for the Standard & Poor’s 500 Index, as slower-than- forecast growth in payrolls fueled concern that the economic recovery is slowing.

All 10 industry groups in the S&P 500 retreated. Alcoa Inc. (AA:US), Freeport-McMoRan Copper & Gold Inc. (FCX:US) and Schlumberger Ltd. (SLB:US) slid at least 1.3 percent as commodity shares declined. JPMorgan Chase & Co. (JPM:US) and Bank of America Corp. (BAC:US) dropped at least 1.4 percent to pace losses among financial companies. Computer and software shares slumped after Informatica Corp. and Seagate Technology Plc (STX:US) said earnings missed their forecasts.

The S&P 500 slipped 0.9 percent to 1,354.68 at 4 p.m. in New York, reversing its gain for the week to a loss of 0.6 percent. The Dow Jones Industrial Average dropped 124.20 points, or 1 percent, to 12,772.47. Volume for exchange-listed stocks in the U.S. was 5.1 billion shares, 25 percent below the three- month average and the second-slowest full trading day of 2012.

“It confirms the view that the U.S. economy is slowing,” said Jack Ablin, chief investment officer of BMO Harris Private Bank in Chicago, which oversees about $60 billion of assets. “We are creating jobs at about less than half the pace in the second quarter than we did in the first quarter, either because of influences from abroad or seasonal adjustments.”

Equities fell as Labor Department figures showed payrolls rose 80,000 last month after a 77,000 increase in May. Economists projected a 100,000 gain, according to the median estimate in a Bloomberg News survey. The unemployment rate held at 8.2 percent. Private employment, which excludes government agencies, increased 84,000 in June, the weakest in 10 months.

‘Disappointing Report’

“On balance it’s a mildly disappointing report,” Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott LLC, which manages about $54 billion, said in a phone interview. “It’s hard for investors to get overly enthused about it unless in this bizarre world you believe this number gives the Fed more impetus to step up with QE3,” he said, referring to another round of stimulus action by the Federal Reserve.

The Fed has already purchased $2.3 trillion of securities in two so-called quantitative-easing programs. Chairman Ben S. Bernanke, speaking at a June 20 Washington press conference, said the Fed is focusing “primarily” on the outlook for jobs in deciding whether to ease further, and more action would be needed without “sustained improvement in the labor market.”

U.S. stocks declined yesterday, halting a three-day advance for the S&P 500, amid disappointment over Europe’s efforts to tame the region’s debt crisis. The European Central Bank reduced its benchmark rate to a record low of 0.75 percent and the People’s Bank of China cut borrowing costs for a second time in a month.

Commodities Tumble

Commodity shares in the S&P 500 slumped 1.2 percent as a group today. The S&P GSCI Index of commodities lost 2.4 percent as oil and gold prices declined. Alcoa, the largest U.S. aluminum producer, tumbled 2.2 percent to $8.73. Freeport- McMoRan, a copper and gold company, fell 1.3 percent to $35.01 while oilfield services company Schlumberger slid 1.4 percent to $65.17.

The Morgan Stanley Cyclical Index (CYC) of companies most-tied to economic growth erased 1.3 percent. The Dow Jones Transportation Average slumped 1 percent. JPMorgan slipped 1.4 percent to $33.90 while Bank of America lost 2.1 percent to $7.66.

Technology Slump

Technology shares dropped the most among S&P 500 groups, erasing 1.8 percent. Informatica (INFA:US) plunged 28 percent to $31.39, the biggest loss since 2001. The provider of corporate data- integration software reported second-quarter earnings and revenue that unexpectedly dropped, missing analysts’ estimates. Informatica said it didn’t adapt as rapidly as it should have to a downturn in demand, especially in Europe.

Other software companies tumbled. Teradata Corp. (TDC:US) fell the most in the S&P 500, sinking 10 percent to $65.01, while Citrix Systems Inc. (CTXS:US) had the second-biggest drop, tumbling 7.6 percent to $77.45.

Seagate declined 0.5 percent to $24.96. The world’s largest maker of computer disk drives said fiscal fourth-quarter sales and profit margin would miss the company’s previous forecast, citing reduced hard-drive shipments and a “supplier quality issue” that affected some products.

Acme Packet Inc. (APKT:US) slumped 14 percent to $15.74. The maker of devices that help transmit voice and data over Internet networks said second-quarter earnings missed its expectation because of continued weakness in the North American service provider market. F5 Networks Inc. (FFIV:US), a developer of software for Internet traffic management, dropped 6.9 percent to $94.49.

Airlines Gain

Navistar International Corp. (NAV:US) fell 15 percent to $24.42. The maker of International brand trucks said it expects additional costs to introduce an engine that will meet U.S. emission standards after its earlier technology failed to comply.

Airlines advanced as a drop in oil spurred expectations that fuel costs will fall. Southwest Airlines Co. (LUV:US) gained 1.3 percent to $9.27 while Delta Air Lines Inc. rose 3.5 percent to $11.

The government’s previous employment report on June 1 showed the weakest jobs growth in a year, and sent the S&P 500 down 2.5 percent for its biggest drop of 2012. Ten-year Treasury yields reached a record low of 1.4387 percent that day. The S&P 500 has rallied 6 percent since then.

Earnings Season

The rebound in equities came after a 9.9 percent tumble from a four-year high in April dragged the S&P 500 to 12.9 times reported earnings, the cheapest level since November. Alcoa is scheduled to unofficially start the second-quarter earnings season when it releases results on July 9.

Analyst estimates compiled by Bloomberg project a 1.8 percent decline in profits for S&P 500 companies in the April- June period, which would mark the first year-over-year decrease since 2009, even as revenue increased 2.5 percent. Analysts still predict profit growth of 7.2 percent for the full year.

Slower-than-forecast growth in employment means labor costs won’t be a threat to corporate profits, according to Neel Kashkari, head of global equities at Pacific Investment Management Co.

“Corporate taxes are not going to go up, cost of labor is going to stay low,” he said in an interview on Bloomberg Television’s “Market Makers” program today. “Corporate profits can continue to stay strong in the short term.”

Pimco is being very selective when it comes to which stocks to buy and is focusing on companies that should be more resilient in the face of a global economic slowdown, Kashkari said. He cited companies such as Wal-Mart Stores Inc. (WMT:US), the world’s largest retailer, low-fare carrier Spirit Airlines (BUSAIRL) Inc. and drugmaker Merck & Co.

Largest Fund

“There are individual names that should do well in this environment,” he said. The Newport Beach, California-based firm’s Pimco Total Return Fund is the world’s largest mutual fund.

The risk of economic shocks from Europe’s debt crisis and slowing growth in China create a flight to high-quality global companies, Kashkari said. Investors should stop holding cash and come back to the market before inflation accelerates as a result of central bank policies meant to stimulate growth, he said.

“Investors are waiting on volatility, but earnings will decay as prices around the economy rise,” he said. “Sitting in cash is not a good option.”

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

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


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Companies Mentioned

  • AA
    (Alcoa Inc)
    • $16.2 USD
    • 0.00
    • 0.0%
  • FCX
    (Freeport-McMoRan Inc)
    • $34.19 USD
    • -0.12
    • -0.36%
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