Bloomberg News

U.S. Stocks Slip Most in 2 Months on Valuations as Dollar Slumps

January 13, 2014

Nickel Ore

Nickel rose 0.9 percent and copper increased 0.5 percent. Photographer: Ron D'Raine/Bloomberg

U.S. stocks fell the most since November, cementing the Standard & Poor’s 500 Index’s worst start to a year since 2009 as investors weighed equity valuations and the outlook for economic stimulus. The dollar slid to a three-week low against the yen and Treasuries rose.

The S&P 500 Index (SPX) lost 1.3 percent by 4:30 p.m. in New York after reaching highest valuation in four years at the end of 2013. The dollar weakened 1.2 percent versus the yen, fueling declines in Japanese index futures. Yields on 10-year Treasuries fell a third day to touch a one-month low. The Stoxx Europe 600 Index gained as banks rallied. Nickel jumped 2.5 percent and U.S. natural gas climbed 5.5 percent. Crude oil slid after Iran agreed to start curtailing its nuclear program.

Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economy is on “solid footing” and that he would support continued cuts to the central bank’s bond buying program. The case against faster reductions in stimulus may be boosted by data due tomorrow, with economists forecasting U.S. retail-sales growth slowed in December. JPMorgan Chase & Co., Goldman Sachs Group Inc., and Citigroup Inc. are among 29 S&P 500 members scheduled to report quarterly results this week.

“I think we’ve had too many blows and sentiment is extremely optimistic and that’s a negative for stocks,” Bruce Bittles, chief investment strategist at RW Baird & Co., said by phone from Sarasota, Florida. His firm oversees $105 billion. “That means for the short term they’re fully invested. Stocks have entered the new year overbought and over-believed and until we digest that, we’re likely to stay in this range.”

Extended Declines

The S&P 500 extended losses after Lockhart’s comments, leaving the gauge down 1.6 percent in 2014, the worst performance over the first eight trading sessions of a year since a 3.5 percent decline at the start of 2009. Last year’s 30 percent surge in the S&P 500 was the best annual rally since 1997. Lockhart acknowledged progress in the U.S. employment market even after a report last week showed payrolls increased less than economists predicted in December.

All 10 main groups in the S&P 500 retreated at least 0.6 percent today, with producers of consumer discretionary products sinking 1.9 percent. Merck & Co. was the only stock to advance in the 30-member Dow Jones Industrial Average (INDU), which slid 1.1 percent. Microsoft Inc. and Walt Disney Co. sank at least 2.8 percent to pace losses among large companies.

Intercept Pharmaceuticals Inc. plunged 18 percent after the stock soared sixfold last week. Juniper Networks Inc. rallied 7.6 percent after the maker of computer-networking equipment was said to be targeted by hedge fund Elliott Management Corp. Beam Inc. jumped 25 percent after Suntory Holdings Ltd. said it will acquire the spirits maker in a $16 billion deal.

Time Warner

Time Warner Cable Inc. (TWX:US) rose about 0.7 percent to more than $133 a share in after-market trading after Charter Communications Inc. offered to buy the company for about $132.50 a share. The proposal values Time Warner at more than $61 billion, including debt. Google Inc. (GOOG:US) jumped about 0.6 percent after-market following a blog post detailing plans to acquire digital thermostat maker Nest Labs for $3.2 billion.

S&P 500 valuations are “lofty by almost any measure,” Goldman Sachs analysts wrote in a note Jan. 10. Further price-to-earnings expansion will be difficult to achieve, according to the note.

The U.S. equities benchmark trades at 15.6 times the estimated earnings for member stocks, exceeding average multiple of 14.1 over the last five years, data compiled by Bloomberg show. The gauge ended 2013 at more than 16 times forward earnings, its highest valuation since the end of 2009.

Earnings Focus

“The way to think about the market is the level of earnings and the multiple which should be applied to that earnings growth,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said today on Bloomberg TV. “Those really are the fundamental drivers of the level of U.S. equity markets this year.”

Earnings for companies in the index probably climbed 4.9 percent on average in the fourth quarter, while sales increased 1.8 percent, according to analyst estimates compiled by Bloomberg. Alcoa Inc. (AA:US) unofficially started the latest results period Jan. 9, reporting profit that fell short of analysts’ estimates.

“We’re at the very beginning of earnings season,” John Carey, a fund manager at Boston-based Pioneer Investment Management Inc., said in an interview. His firm manages about $220 billion worldwide. “Whatever macro news we have in the near-term will be overshadowed by earnings announcements coming out and outlooks for the rest of the year.”

Dollar Index

The Bloomberg Dollar Spot Index slumped 0.3 percent in a third day of declines. The dollar touched 102.86 yen, the weakest level since Dec. 18. Futures on Japan’s Nikkei 225 Stock Average slid 2.1 percent in Chicago to 15,500 with the country’s stock market closed today for a holiday.

Benchmark 10-year Treasury yields declined three basis points, or 0.03 percentage point, to 2.83 percent, touching the lowest level since Dec. 11. The rate fell 11 basis points Jan. 10, the most since September.

Lockhart said the Fed may keep interest rates low well past when the U.S. unemployment rate reaches 6.5 percent. The rate fell to 6.7 percent in December, the lowest level since October 2008.

“The Fed is still one of the most dovish central banks in the world,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The data that we had on Friday and the performance of the dollar since then underscores the point that the Fed is a very accommodative central bank and it could remain very accommodative for some time yet.”

Commodity Markets

The S&P GSCI gauge of 24 commodities dropped 0.1 percent, after rising 0.7 percent Jan. 10. Nickel rallied after jumping 3.3 percent Jan. 10 on speculation Indonesia would implement a ban on exports of mineral ore. The ruling came into force yesterday in the southeast Asian nation, which is the biggest global producer of the unrefined metal used to make stainless steel.

Spot gold climbed 0.4 percent to a one-month high as demand for bars and coins increased in Asia. Futures for February delivery advanced 0.3 percent to settle at $1,251.10 an ounce in New York. Soybeans jumped the most in five weeks on signs of higher demand for U.S. supplies from China, the world’s No. 1 consumer of the oilseed used in livestock feed.

Natural gas futures surged the most in three weeks on speculation that government data will show a record decline in U.S. stockpiles of the heating fuel after cold weather boosted demand. Wheat advanced after the U.S. Department of Agriculture said Jan. 10 that U.S. winter-wheat planting unexpectedly declined for the first time in four years.

Goldman Outlook

West Texas Intermediate oil for February delivery decreased 1 percent to $91.80 a barrel in New York. Iran, the fifth-biggest member in the Organization of Petroleum Exporting Countries, will allow more intrusive inspections on its nuclear program in exchange for partial sanctions relief.

Goldman analysts said in a Jan. 12 dated report that the commodities cycle that sent prices rising almost fourfold over 10 years is reversing and will eventually drive raw materials into a structural bear market. Growth in shale oil output will keep U.S. energy prices low, according to the report.

The MSCI Emerging Markets Index rose 0.8 percent, trimming its decline this year to 2.5 percent. India’s S&P BSE Sensex (SENSEX) Index added 1.8 percent, the most in three weeks, after an unexpected drop in factory output spurred optimism the nation’s central bank won’t raise interest rates.

Emerging Stocks

The Jakarta Composite Index jumped the most in almost four months, advancing 3.2 percent, and the rupiah strengthened 0.9 percent against the dollar. The ore-export ban saw Freeport-McMoRan Copper & Gold Inc. allowed to continue shipping copper concentrates, fueling speculation the watered-down regulation will have a limited impact on the country’s current-account balance.

Benchmark gauges in Hungary, the Philippines and Thailand climbed more than 1.5 percent. India’s rupee and South Korea’s won gained at least 0.4 percent versus the dollar.

About two stocks rose for each that fell in Europe, with trading volumes 4.3 percent higher than the 30-day average on the Stoxx 600 gauge, which added 0.2 percent today. A measure banks climbed to the highest level since April 2011 after regulators eased a debt-limit rule for lenders.

European Banks

Deutsche Bank AG, Germany’s biggest bank, rallied 4.7 percent to the highest since March 2012 and Societe Generale SA, France’s second-largest lender, climbed 2.2 percent. The Basel Committee on Banking Supervision modified its proposed leverage ratio -- the amount of capital held to loans made -- at a meeting in Basel, Switzerland yesterday.

Alcatel-Lucent SA (ALU) gained 5.1 percent after three people familiar with the matter said the telecommunications-equipment supplier has held talks to sell its enterprise business to companies including Unify GmbH & Co. KG, a venture between Gores Group LLC and Siemens AG. Suedzucker AG surged 11 percent as the German sugar producer posted third-quarter operating profit that beat analysts’ estimates.

Italy’s 10-year bond yields fell three basis points to 3.88 percent after the nation sold 8.2 billion euros ($11.2 billion) of debt, compared with a maximum target of 8.25 billion euros.

To contact the reporters on this story: Callie Bost in New York at cbost2@bloomberg.net; Jeremy Herron in New York at jherron8@bloomberg.net

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

Nickel rose 0.9 percent and copper increased 0.5 percent. Photographer: Ron D'Raine/Bloomberg Traders work on the floor of the New York Stock Exchange, on Jan. 13, 2014. Photographer: Scott Eells/Bloomberg Jan. 13 (Bloomberg) -- Martin Feldstein, an economics professor at Harvard University, talks about the U.S. economy and labor market. Feldstein speaks with Tom Keene and Scarlet Fu on Bloomberg Television's "Surveillance." Chris Whalen of Carrington Investment Services also speaks. (Source: Bloomberg) Jan. 13 (Bloomberg) -- Jan Hatzius, chief economist at Goldman Sachs Group Inc., discusses the outlook for the U.S. economy, Federal Reserve policy under Janet Yellen and wages. He speaks in London with Manus Cranny on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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Companies Mentioned

  • TWX
    (Time Warner Inc)
    • $84.01 USD
    • -0.25
    • -0.3%
  • GOOG
    (Google Inc)
    • $593.35 USD
    • -2.63
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