Bloomberg News

U.S. Stocks Drop as Fed Keeps Stimulus Pace Amid Growth Signs

October 30, 2013

U.S. stocks fell, with the Standard & Poor’s 500 Index halting a four-day winning streak, after the Federal Reserve fueled bets it will begin to cut stimulus even as it maintained the pace of monthly bond buying as expected.

LinkedIn Corp. (LNKD:US) lost 9.3 percent after its quarterly sales outlook missed analysts’ predictions. Western Union Co. (WU:US) tumbled 12 percent after saying costs tied to regulatory compliance will prevent operating profit from rising next year. General Motors Co. (GM:US) gained 3.2 percent as quarterly profit topped estimates.Buffalo Wild Wings (BWLD:US) Inc. surged 9 percent after raising its full-year earnings forecast.

The S&P 500 fell 0.5 percent to 1,763.31 at 4 p.m. in New York after rising yesterday to a third straight record. The index has jumped 24 percent this year, on track for its best annual gain since 2003. The Dow Jones Industrial Average lost 61.59 points, or 0.4 percent, to 15,618.76 today. About 6.4 billion shares changed hands on U.S. exchanges, 7.4 percent above the three-month average.

“People are looking at it and saying, ‘OK it’s about what we expected, so there’s no real upside, and we’ve traded it up, so now let’s back off a little bit,’” Brad McMillan, chief investment officer for Waltham, Massachusetts-based Commonwealth Financial Network, said in a phone interview. His firm has more than $71 billion under management. “Everyone was buying in the anticipation of continued stimulus. That is more or less exactly what they’ve got.”

Statement Change

The Fed decided to press on with the $85 billion in monthly bond purchases that have helped propel the S&P 500 higher by more than 160 percent from a 12-year low in 2009. The gauge has surged 4.9 percent in October, heading for the biggest monthly gain in two years, as lawmakers ended a 16-day government shutdown and agreed to extend the U.S. borrowing authority, avoiding a possible debt default.

While Fed policy makers said fiscal policy is “restraining economic growth,” the central bank said it sees signs of “underlying strength.” The Fed removed a sentence from its previous policy statement that had said tighter financial conditions could slow the improvement in the economy, sparking speculation it could cut stimulus in the coming months.

“When you look at the reaction in the market, investors are really taking the opinion that the taper may actually come sooner than previously thought,” Chris Gaffney, senior market strategist at EverBank Wealth Management, said by phone from St. Louis. “Everything indicates that people, when they read that statement, they felt like the Fed continues to have a positive view on the economy and they would be starting to taper maybe before the expected March date.”

Inflation Watch

The central bank was expected to maintain the pace of assets purchases at the current level until March 2014, according to a Bloomberg survey this month.

The Fed left unchanged its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent. A report today showed the cost of living in the U.S. rose 0.2 percent as projected in September, capping the smallest year-to-year gain in five months.

Separate data based on payrolls showed companies added fewer workers than projected in October, adding to signs that growth slowed in the weeks before the shutdown. The government closure will reduce economic growth by 0.3 percentage points this quarter at an annual rate, according to a Bloomberg News survey of economists.

Earnings Season

While the S&P 500 (SPX)’s rally has lifted equity valuations to a four-year high, with the index trading at 16 times estimated operating earnings, that’s still below the multiples at the market’s two previous peaks, when the ratio reached 16.5 in October 2007 and 25.7 in March 2000, data compiled by Bloomberg show.

Investors have also been assessing better-than-expected corporate earnings from the third quarter. Profits have grown by an average of 5 percent among the 312 S&P 500 companies that have reported results so far, while sales have gained 2.9 percent. Profits for the broad equity gauge probably increased 3.7 percent during the quarter as sales climbed 2.4 percent, according to analysts’ estimates compiled by Bloomberg. Some 35 members of the S&P 500 reported results today.

Facebook Results

Facebook Inc., which is not in the gauge, slipped 0.7 percent to $48.67 at 6:32 p.m. in New York, erasing a 10 percent rally in extended trading. The world’s largest social network reported third-quarter sales that topped analysts’ estimates as advertisers boosted spending on promotions targeting users on smartphones and tablets.

All 10 main S&P 500 groups dropped at least 0.2 percent today. Utilities and consumer-staples stocks fell the most, dropping more than 0.6 percent.

LinkedIn lost 9.3 percent, the most since May, to $224.11. The world’s biggest professional-networking site said fourth-quarter revenue will be $415 million to $420 million. That trailed the average analyst estimate of $438.9 million.

Western Union Co. tumbled 12 percent to $16.85 for the biggest slide in the S&P 500 and its lowest level since July 2. The largest money-transfer business reported a drop in third-quarter profit. Operating income won’t increase next year because of additional investments needed to comply with new and existing regulations, Chief Executive Officer Hikmet Ersek said.

Steel, Cars

U.S. Steel Corp. (X:US) slid 2.9 percent to $24.72. The largest U.S. producer of the metal will permanently close parts of two plants as it cuts costs after four unprofitable quarters. The company was downgraded to hold from buy at Deutsche Bank by equity analyst David Martin.

General Motors gained 3.2 percent to $37.23. The largest U.S. automaker posted third-quarter profit (GM:US) that beat estimates as North American earnings, boosted by redesigned large pickups, helped buffer international losses.

Buffalo Wild Wings jumped 9 percent to $141.22 after saying late yesterday it expects full-year earnings growth of 28 percent, up from a previous estimate of 25 percent. That implies adjusted profit of $3.83 a share, surpassing the average analyst projection of $3.64.

Electronic Arts Inc. (EA:US) rallied 7.8 percent to $26 for the biggest gain in the S&P 500. The second-largest U.S. video-game publisher was raised to strong buy from hold by Needham & Co. by equity analyst Sean McGowan.

Sealed Air Corp. (SEE:US) jumped 6.4 percent to $30.35. The manufacturer of packaging materials raised its full-year profit forecast above analyst estimates (SEE:US).

Gilead Sciences Inc. gained 4.6 percent to a record $72.67. The drug maker reported third-quarter adjusted profit that beat analyst estimates as antiviral revenue rose 14 percent. The company raised its product sales forecast for the year.

To contact the reporters on this story: Nick Taborek in New York at ntaborek@bloomberg.net; Aubrey Pringle in New York at apringle1@bloomberg.net

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


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Companies Mentioned

  • LNKD
    (LinkedIn Corp)
    • $207.75 USD
    • -2.75
    • -1.32%
  • WU
    (Western Union Co/The)
    • $16.65 USD
    • -0.20
    • -1.2%
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