Bloomberg News

U.S. Stocks Little Changed on Mergers, Data Before Fed

July 28, 2014

U.S. stocks were little changed, after erasing an earlier loss, as merger activity and optimism over corporate earnings offset concern over crises abroad before a Federal Reserve policy decision.

Discount chain Family Dollar Stores Inc. soared 25 percent after Dollar Tree Inc. agreed to buy it for about $8.5 billion. Trulia (TRLA:US) Inc. jumped 15 percent as Zillow Inc. agreed to purchase the company in a $3.5 billion deal. Tyson Foods Inc. climbed 2.6 percent as it agreed to sell poultry businesses in Mexico and Brazil for $575 million. Cummins Inc. fell 3.2 percent to lead declines among industrial shares.

The Standard & Poor’s 500 Index added less than 0.1 percent to 1,978.91 at 4 p.m. in New York, erasing an earlier drop of as much as 0.6 percent. The Dow Jones Industrial Average rose 22.02 points, or 0.1 percent, to 16,982.59. More than 5.4 billion shares changed hands on U.S. exchanges, 5.7 percent below the three month average.

“The market has been very benign,” Sam Wardwell, an investment strategist at Pioneer Investments in Boston, said in a phone interview. His firm manages about $250 billion. “You got a little bit geopolitical fear out there. We’re still on track and as long as wars in the rest of the world don’t upset the upper card, the second half of this year continues to look like it’s going to be a gradually improving year.’

Mergers and acquisitions are booming amid low interest rates and growing corporate cash hoarding. More than $1.1 trillion worth of takeovers have been announced this year, exceeding the total of 2013, data compiled by Bloomberg show.

Quarterly profit growth is poised for the fastest increase in almost three years. Companies in the S&P 500 have reported an 11 percent gain in second-quarter earnings, data compiled by Bloomberg show. Should the pace continue, the gain would exceed all periods since the third quarter of 2011.

Corporate Earnings

Pfizer Inc., Reynolds American Inc. and American Express Co. are among some 150 S&P 500 companies reporting earnings this week. About 78 percent of U.S. companies that have posted results this season have beaten analysts’ estimates for profit, while 66 percent exceeded sales projections, according to data compiled by Bloomberg.

Stocks slumped earlier in the day as fewer Americans than forecast signed contracts to buy previously owned homes in June, a sign residential real estate is struggling to strengthen. An S&P index of homebuilder shares dropped 1.2 percent to the lowest level since April.

The S&P 500 recovered today after retreating 0.5 percent on July 25 and losing as much as 0.6 percent this morning. Not since the bull market began has buying dips been a surer way of making money.

Cowboy Hats

Declines in the benchmark gauge for American equity are lasting an average of 1.5 days in 2014, the shortest since at least 2009, according to data compiled by Bloomberg. Starting last year, returns on days after the index fell have averaged 0.13 percent, the highest since they were 0.38 percent in 2009.

‘‘I wouldn’t say that we’re putting on our cowboy hats and saying this is an unstoppable bull, but you have a lot of factors going in the right direction,” Patricia Edwards, Seattle-based managing director of investments at the Private Client Reserve of U.S. Bank Wealth Management, said in a phone interview. “We’re seeing continued upward momentum in the economy. You’ve got the earnings that have been coming in fairly well, and you’ve got the mergers and acquisitions.”

Overseas Crises

Outside the U.S., international pressure mounted on Israel to end its three-week offensive in the Hamas-controlled Gaza Strip, with President Barack Obama and the United Nations Security Council demanding an immediate truce.

In Europe, President Vladimir Putin faces intensifying U.S. and European sanctions aimed at forcing him to help end the separatist war in neighboring Ukraine. The Obama administration said it had satellite photos showing Russia firing across the border at Ukraine forces.

The S&P 500 ended little changed last week as investors weighed corporate earnings. The gauge closed 0.5 percent below its all-time high of 1,987.98 reached July 24. The index has rallied 7.1 percent this year, as the economy shows signs of recovering from a 2.9 percent drop in the first quarter amid renewed pledges from the Fed to continue stimulus.

The U.S. central bank announces its next policy decision at the conclusion of a two-day meeting on July 30. Investors will get a reading on second-quarter growth that same day, while the government’s labor report on Aug. 1 may show employers added 231,000 jobs this month.

Fed Stimulus

“It’s another big week of earnings, with the jobs report on Friday,” Michael James, a Los Angeles-based managing director of equity trading at Wedbush Securities Inc., said in an interview. “Sentiment in the short term is a little more cautious.”

The Fed’s Open Market Committee will scale back its monthly asset purchases to $25 billion from $35 billion on July 30, according to economists surveyed by Bloomberg, keeping it on pace to end the program late this year. The policy-making committee last month repeated it’s likely to “reduce the pace of asset purchases in further measured steps” and that it expects interest rates to stay low for a “considerable time” after the bond-buying ends.

Chair Janet Yellen and her fellow policy makers are debating how long to keep interest rates near zero as the U.S. labor market improves and inflation moves closer to the Fed’s 2 percent goal.

Equity Valuations

Three rounds of monetary stimulus from the Fed and better than-forecast corporate earnings have driven the S&P 500 up 192 percent from its March 2009 bottom. The S&P 500 is trading at 18.1 times earnings of its members, around the highest valuation for the gauge since 2010.

Goldman Sachs Group Inc. said in a report last week that equities are at risk of a temporary selloff, citing rising bond yields and high valuations for lowering its rating on stocks.

The Chicago Board Options Exchange Volatility Index (VIX), known as the VIX, fell 1 percent to 12.56, reversing an earlier rally of 7.5 percent.

Seven out of the 10 S&P 500 main groups advanced as utility companies gained 1.5 percent. Industrial and consumer-staples shares declined 0.5 percent.

Dollar Tree added 1.2 percent to $54.87. Family Dollar surged 25 percent to $75.74. The deal will create a sprawling discount chain with $18 billion in sales and more locations than any other retailer in the U.S. It also fulfills the ambitions of billionaire investors Carl Icahn and Nelson Peltz, who had acquired major stakes in Family Dollar and pushed for a sale.

M&A Deals

Trulia soared 15 percent to $65.04. The all-stock deal positions a unified Zillow and Trulia to capture a larger share of digital real estate ads as more people shift house hunting onto the Web and property agents deploy more marketing dollars onto the Internet. Zillow gained 0.9 percent to $160.32.

Tyson Foods climbed 2.6 percent to $40.56. The largest U.S. meat producer will sell poultry businesses in Mexico and Brazil as it shrinks its foreign operations and focuses on the expansion of its prepared foods segment.

Cummins slipped 3.2 percent to $145.35 even after the maker of diesel engines raised its full-year revenue forecast. Expectations were “fairly high,” Jefferies Group LLC analysts including Stephen Volkmann wrote in a note.

AcelRx Pharmaceuticals (ACRX:US) Inc. plummeted 41 percent to $6.39. The pharmaceutical company said Zalviso, a pain treatment for adult hospital patients, failed to get approval from the Food and Drug Administration, which has requested additional information on the drug.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

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


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Companies Mentioned

  • TRLA
    (Trulia Inc)
    • $55.91 USD
    • -0.60
    • -1.07%
  • ACRX
    (AcelRx Pharmaceuticals Inc)
    • $7.29 USD
    • 0.04
    • 0.55%
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