U.S. stocks fell for the week, with benchmark indexes posting the worst losses since June, as better-than-estimated data on trade and service industries fueled concern the Federal Reserve may reduce its stimulus.
JPMorgan Chase & Co. and Bank of America Corp. dropped at least 2.6 percent amid federal legal actions tied to their past mortgage-backed bond practices. Homebuilders tumbled 6.6 percent as a group amid concern rising interest rates and slow orders may continue to hurt the industry. International Business Machines Corp. slumped 3.8 percent to its 2013 low on signs of slowing demand for hardware. Tesla Motors Inc. and Groupon Inc. surged as results beat analyst estimates.
The Standard & Poor’s 500 Index dropped 1.1 percent to 1,691.42. The Dow Jones Industrial Average slid 232.85 points, or 1.5 percent, to 15,425.51. Both gauges capped their worst week since June 21 after closing at records on Aug. 2.
“There is still plenty of skepticism and anxiety in the market,” Hank Smith, who oversees $7 billion as chief investment officer at Radnor, Pennsylvania-based Haverford Trust Co., said by phone yesterday. “The uncertainty of when will the Fed taper? How much will they taper?” he said. “The market has come a long way this year. It will be interesting to see if investors take advantage of this pullback as they did clearly in the pullback in May-June.”
The weekly drop in stocks came after the S&P 500’s valuations jumped to their highest levels in more than three years. The benchmark index trades at 15.3 projected earnings, up from a multiple of 13.1 at the beginning of this year, data compiled by Bloomberg show.
Speculation that the Fed will pare bond purchases in September as the economy strengthens has whipsawed the market. The S&P 500 sank as much as 5.8 percent over the five weeks ended June 24, before recovering all the losses to hit an all-time high on Aug. 2.
Charles Evans, Sandra Pianalto and Richard Fisher, regional Fed presidents in Chicago, Cleveland and Dallas, said during the week that the central bank may be closer to tapering as the labor market recovers. Fed stimulus has helped propel the S&P 500 up more than 150 percent from its bear-market low in 2009.
America’s trade deficit narrowed in June to the smallest in almost four years, service industries expanded in July at the fastest pace in five months, and jobless claims fell to the lowest monthly rate since before the recession, economic reports showed during the week. In Asia, the Chinese economy is showing signs of improvement, with data on industrial output, trade and service industries topping economist forecasts.
Some 449 companies in the S&P 500 have reported quarterly results so far this earnings season. Among them, 72 percent have exceeded analysts’ profit estimates and 56 percent have beaten sales projections, data compiled by Bloomberg show.
“Earnings are pretty much done and tapering is on the way,” Rick Fier, director of equity trading at Conifer Securities LLC in New York, said in an interview. “Catalysts to move us higher are done for the short term. We get the sense that the next move will be lower, nothing terrible but lower seems easier than higher at this point.”
The Chicago Board Options Exchange Volatility Index, or VIX, jumped 12 percent to 13.41 during the week. The equity volatility gauge is down 26 percent for the year.
Nine of 10 industry groups in the S&P 500 declined as telephone and financial shares fell the most, sinking at least 1.9 percent.
JPMorgan dropped 3.5 percent $54.52. The biggest U.S. bank said it’s under federal criminal investigation for practices tied to sales of mortgage-backed bonds. The Justice Department’s civil division found in May that sales practices broke civil laws after it examined securities tied to subprime and Alt-A loans sold to investors from 2005 through 2007.
Bank of America (BAC:US) erased 2.6 percent to $14.45. The Department of Justice accused the company in a lawsuit of misleading investors about the quality of loans tied to $850 million in mortgage-backed securities. The complaint chronicles friction among bank staff in 2007 and 2008 as they excluded risky Alt-A loans while leaving in wholesale debts once scorned as “toxic waste” by the firm’s then-chief.
An S&P index of homebuilders slumped as all of its members retreated at least 4.5 percent. Decelerating orders and potentially higher interest rates may continue to hurt investor sentiment toward the housing industry, Robert Wetenhall, an analyst at RBC Capital Markets LLC, wrote in a note.
PulteGroup Inc. tumbled 9 percent to $15.67 while D.R. Horton Inc. slipped 7.3 percent to $18.89.
IBM (IBM:US) dropped 3.8 percent to $187.82 for the biggest loss in the Dow. The world’s largest computer-services company said U.S. employees in its hardware division will take a furlough week with one-third pay starting either Aug. 24 or Aug. 31.
The company is cutting costs after server demand slowed in the second quarter. Sales in the hardware business, which includes storage devices and microelectronics, slid 12 percent in the period from a year earlier.
First Solar Inc. slid 13 percent, the most in the S&P 500, to $41.02. the largest U.S. solar-panel manufacturer reported lower second-quarter profit as sales slipped 46 percent.
J.C. Penney (JCP:US) Co. sank 9.9 percent to $12.87. Investor Bill Ackman called for the retailer to oust Chairman Tom Engibous, escalating a public dispute with his fellow directors as he seeks a replacement for Chief Executive Officer Mike Ullman.
Raw-material producers were the only group to gain for the week among the S&P 500’s 10 main industries, rising 0.9 percent, amid data that showed a stabilizing economy in China, the world’s biggest consumer for commodities from iron ore to coal.
Cliffs Natural Resources Inc., the largest U.S. iron-ore producer, climbed 18 percent to $24.35 in the week. Peabody Energy Corp., the largest U.S. coal producer, advanced 11 percent to $17.90.
Tesla (TSLA:US) soared 11 percent to $153. The electric-car company led by Elon Musk posted second-quarter results that surpassed analysts’ estimates on a surge in Model S sedan deliveries.
Groupon Inc. rallied 22 percent to $10.61. The operator of the largest daily-deals website reported a second-quarter net loss (GRPN:US) that was narrower than analysts forecast. The company, which lost 87 percent of its value in the year after going public in November 2011, named co-founder Eric Lefkofsky as chief executive officer to lead turnaround plans.
Credit Suisse Group AG cut its holdings of equities after global stocks rallied to a five-year high and Fed policy makers began considering whether to trim stimulus measures. Switzerland’s second-largest bank reduced its allocation to stocks to neutral from overweight, meaning it no longer holds more of the asset class than is represented in global benchmarks, according to a note to clients dated Aug. 5.
“The fundamental environment remains attractive, but the markets are overbought in the wake of the recent rally,” Michael Strobaek, the Zurich-based global chief investment officer at Credit Suisse, wrote in the report. The “combination of a positive economic outlook and a further supportive monetary policy seems largely priced into the markets. We therefore see limited upside in the near term,” he wrote.
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