U.S. stocks fell for the week, giving the Dow Jones Industrial Average its biggest drop in a year, as company forecasts disappointed and economic data boosted speculation the Federal Reserve will reduce stimulus.
Cisco Systems Inc. and Wal-Mart Stores Inc. dropped at least 3.6 percent during the week after issuing sales projections that fell short of estimates. US Airways Group Inc. slid 14 percent after the Justice Department moved to block its proposed merger with AMR Corp. Homebuilders advanced as an increase in industry confidence overshadowed higher rates. Apple Inc. (AAPL:US) surged 11 percent as billionaire investor Carl Icahn disclosed a stake in the company.
The Standard & Poor’s 500 Index (SPX) retreated 2.1 percent to 1,655.83, the largest weekly drop since June 21. The Dow slid 344.04 points, or 2.2 percent, to 15,081.47, its worst performance since June 2012. Both gauges slipped for the second straight week after reaching records Aug. 2. The yield on 10-year Treasuries touched the highest level since July 2011.
“The market has got to digest three really big things,” James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management, said in an interview with Sara Eisen and Tom Keene on Bloomberg Television. “First, it is digesting the really big move we have had since last fall. We have to adjust to a major, significant repricing in interest rates. We are going to have to digest tapering, which I think is going to happen this year.”
Equities fell during the week, with the S&P 500 losing 1.4 percent on Aug. 15, as signs of an improving global economy stoked concerns the Fed will begin reducing bond purchases next month. Reports showed employers fired the fewest workers since 2007 in the first week of August while retail sales rose in July for a fourth consecutive month. The cost of living in the U.S. increased for the third straight month. Data overseas showed the euro area’s economy emerged from a record-long recession in the second quarter.
Fed stimulus helped propel the S&P 500 up more than 150 percent from its bear-market low in 2009. Dennis Lockhart, the Fed Bank of Atlanta president who has backed the central bank’s monthly bond purchases, said policy makers may start to slow buying at any of their next few meetings.
The central bank will reduce its monthly $85 billion in asset buying at its meeting on Sept. 17-18, according to 65 percent of economists surveyed by Bloomberg from Aug. 9 to Aug. 13. In a survey last month, only half of economists predicted a reduction in September.
“When you have numbers that indicate that the job market is clearly stabilizing and improving and inflation is percolating, that’s a combination for the Fed to take their foot off the accelerator,” Ron Florance, a Scottsdale, Arizona-based deputy chief investment officer at Wells Fargo Private Bank, which oversees $170 billion, said by phone. The stock market’s reaction showed “a dose of reality that the party of free money will come to an end, and it’s looking sooner rather than later,” he said.
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 (VIX) trades at 15 times projected earnings, up from a multiple of 13.1 at the beginning of this year, data compiled by Bloomberg show.
Stocks have rallied as corporate earnings have topped estimates. Some 463 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 55 percent have beaten sales projections, data compiled by Bloomberg show.
The Chicago Board Options Exchange Volatility Index, or VIX, jumped 7.2 percent to 14.37 during the week and is up 21 percent from a low on Aug. 5. The equity volatility gauge is still down 20 percent for the year.
All 10 industries in the S&P 500 retreated as utilities and consumer shares fell at least 3.1 percent to lead declines. Utilities, whose 4.1 percent yield is the second-highest among 10 industries, dropped 4.4 percent as a group amid concern rising bond yields will cut demand for equity income.
Cisco Systems tumbled 6.8 percent to $24.27. Facing weaker sales outside the U.S., the biggest maker of networking equipment is cutting 4,000 jobs, or 5 percent of the workforce, underscoring the pressures facing the company’s core businesses and profit margins from competitors including Huawei Technologies Co., Juniper Networks Inc. and Hewlett-Packard Co.
Wal-Mart Stores Inc. fell 3.6 percent to $74.11. The world’s largest retailer said currency fluctuations cut second-quarter sales by $680 million and will weaken growth this year, adding pressure on the company as it struggles to overcome slower demand in the U.S.
US Airways slumped 14 percent to $16.01. The U.S. Justice Department moved to block a proposed American Airlines-US Airways merger, saying the deal would lead to less competition in the industry and higher prices for consumers.
TripAdvisor Inc. tumbled 12 percent to $70.99 for the biggest drop in the S&P 500. The online travel research company fell after an executive speaking at the Canaccord Genuity Growth Conference in Boston said summer so far has been “bumpier” than forecast and traffic is “holding but not as strong” as anticipated.
Macy’s Inc. fell 7.3 percent to $44.99 as the department-store chain cut its profit forecast after weaker-than-estimated sales. Chief Executive Officer Terry Lundgren used promotions during the quarter to clear inventory that had built up as a cool spring curtailed purchases of summer clothing and the bumpy economy restrained consumers’ spending.
An S&P gauge of homebuilders added 0.8 percent. The group fell early in the week amid concern rising mortgage rates will hurt the industry. They rebounded after reports showed confidence among builders climbed in August to the highest level since 2005 and housing starts advanced in July.
PulteGroup Inc. jumped 3.9 percent to $16.28. KB Home rose 2.8 percent to $17.01. Lennar Corp. increased 2.9 percent to $33.88.
Apple gained 11 percent to $502.33, climbing above $500 (AAPL:US) for the first time since January and posting its best weekly gain in almost two years, after Icahn said he’s a shareholder. The investor, who has made a career of pushing companies to make changes to boost shares, bought $1 billion worth of stock and wants Apple to allocate $150 billion for a repurchase, said a person with knowledge of his plans.
J.C. Penney (JCP:US) Co. rose 4.1 percent to $13.40. The advance snapped a two-week slide as investor Bill Ackman resigned from the board, ending a dispute over the company’s leadership. Ackman, whose Pershing Square Capital Management LP is the retailer’s largest shareholder, had called for the company to oust Chairman Tom Engibous, and pushed the board to speed up its search for CEO Mike Ullman’s successor.
“Cisco told us that IT budgets and corporate spending are shaky; Wal-Mart told us that the consumer is still struggling,” Ian Winer, director of equity trading at Wedbush Securities Inc., said in an interview. “Now throw in that bond yields are spiking, and I am not sure at 1,655 on the S&P 500 what is that exciting about stocks. I would classify the selloff as warranted and the beginning of a bigger move down.”
To contact Bloomberg News staff for this story: Nick Taborek in New York at email@example.com; Alex Barinka in New York at firstname.lastname@example.org
To contact the editor responsible for this story: Lynn Thomasson at email@example.com