Bloomberg News

U.S. Stocks Have Biggest Weekly Drop Since April on Fed Concern

June 21, 2013

U.S. stocks fell for the week, sending benchmark indexes to their worst retreat since April, after Federal Reserve Chairman Ben S. Bernanke said he may phase out monetary stimulus.

All 10 main industries in the Standard & Poor’s 500 Index declined for the week. Telephone and utility companies sank the most as rising bond yields reduced demand for dividends. Homebuilders tumbled the most in a year as D.R. Horton Inc. dropped 12 percent on concern higher interest rates may threaten a housing recovery. Newmont Mining Corp. lost 9.5 percent as gold reached the lowest level since 2010.

The S&P 500 (SPX) slipped 2.1 percent to 1,592.43 over the five days, trimming its 2013 gain to 12 percent. The Dow Jones Industrial Average lost 270.78 points, or 1.8 percent, to 14,799.40. Both gauges had their worst week since April 19.

“There’s no clarity about what the Fed is going to do and if you ask 10 people what will happen, you get 11 different answers,” Donald Selkin, who helps manage about $3 billion of assets as the chief market strategist at National Securities Corp. in New York, said by phone. “We’re in uncharted waters and that’s freaking people out.”

Global equities slumped, with the S&P 500 posting the biggest two-day plunge since November 2011, after Bernanke said on June 19 that the Fed may begin dialing back its unprecedented bond-buying this year and end it in mid-2014 if the economy achieves the Fed’s objectives.

Economic Data

Economic data during the week showed sales of previously owned homes in the U.S. climbed in May to the highest level in more than three years and manufacturing improved in June, supporting the Fed’s view that risks to the expansion are abating.

The S&P 500 has fallen 4.6 percent since May 21, the day before Bernanke suggested the Fed could start to taper if the economy improved in a “real and sustainable way.” Three rounds of monetary stimulus from the central bank and corporate earnings that beat forecasts have propelled the bull market in U.S. stocks into a fifth year. The benchmark index has risen 135 percent from a 12-year low in 2009.

The central bank will cut its $85 billion in monthly bond purchases by $20 billion at the Sept. 17-18 policy meeting, according to 44 percent of economists in a Bloomberg survey. In a June 4-5 survey, only 27 percent of economists forecast tapering would start in September.

Equities ‘Overreacted’

“This is an environment in which equities should perform OK because the reason in which the Fed is raising interest rates, or in this case tapering QE, is because the economy is improving, not deteriorating,” Andres Garcia-Amaya, New York-based global market strategist at JPMorgan Chase & Co.’s mutual funds unit, which oversees $400 billion in assets, said by phone. “The market on the equity side has overreacted.”

The S&P 500 tumbled 3.9 percent over the two days through June 20, sending the S&P 500 below its average price over the past 50 days for the second time this year. While the index rebounded 0.3 percent on the last day of the week, it’s still below the threshold, which is used by some analysts to gauge the market’s trend.

The Chicago Board Options Exchange Volatility Index (VIX), or VIX, rose 10 percent to 18.90 for the week. The equity volatility gauge, which moves in the opposite direction to the S&P 500 about 80 percent of the time, has surged 67 percent from a six-year low in March and reached its highest level of the year on June 20.

Equity volume picked up. About 7.68 billion shares changed hands a day on U.S. exchanges over the week, 24 percent higher than the average daily volume during the previous 12 months. About 10.7 billion shares traded on June 21, the highest since October 2011.

Market Turbulence

Exxon Mobil Corp. fell 1.2 percent to $89.48 for the week, bringing its market cap to about $398 billion. The market’s retreat left no company in the world valued at more than $400 billion for the first time since April, according to data compiled by Bloomberg.

“You’re going to continue to see the turbulence,” Brad McMillan, chief investment officer for Waltham, Massachusetts-based Commonwealth Financial Network, said in a phone interview on June 19. His firm has more than $71 billion under management. “The market is trying to weigh whether in fact the benefits for corporate earnings from a stronger economy are going to offset lower debt-services costs over time.”

Dividend Yields

Concern that slower bond-buying from the Fed will push Treasury yields higher prompted investors to sell shares of telephone and utility stocks, which yield the most in dividends among the 10 main groups in the S&P 500. Yields on 10-year Treasury bonds climbed to a 22-month high.

Phone companies (S5TEL:US), which yield 4.5 percent, plunged 3.7 percent. Verizon Communications Inc. sank 3 percent to $49.52 and AT&T Inc. retreated 4 percent to $34.47.

Sprint Nextel Corp. declined 4.8 percent to $6.97. Dish Network Corp. abandoned its effort to acquire Sprint, making way for bidding rival SoftBank Corp. to gain control of the third-biggest U.S wireless carrier.

Utilities, which yield 4.2 percent, fell 2.9 percent. AES Corp., a power producer with operations in more than 20 countries, tumbled 7.1 percent to $11.48. Pinnacle West Capital Corp., which provides electric service in Arizona, declined 8.3 percent to $52.76.

Newmont Mining paced declines among commodity producers as the S&P GSCI index of raw materials sank 3.4 percent. Newmont, the largest U.S. gold producer, tumbled 9.5 percent to $30.05 as the metal’s price plunged. Freeport-McMoRan Copper & Gold Inc. dropped 4.8 percent to $28.16.

Homebuilders Slip

An S&P index of homebuilders slipped 8.7 percent for the biggest retreat in 12 months. All 11 members fell in the week. Lennar Corp. dropped 9.7 percent to $35.25 and PulteGroup Inc. lost 9.8 percent to $18.81.

Oracle slumped 11 percent to $30.14. The largest maker of database software reported fiscal fourth-quarter sales of $11 billion, missing analysts’ estimates as customers shifted spending to competitors’ Web-based business tools.

Micron Technology Inc. advanced 8.9 percent to $13.90. The largest U.S. maker of memory chips reported fiscal third-quarter sales and profit that topped analysts’ estimates, benefiting from price increases.

To contact the reporter on this story: 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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