U.S. stocks fall as Fed’s Williams discusses tapering stimulus

May 16, 2013 11:04 AM

U.S. stocks fell, after the Standard & Poor’s 500 Index extended a record yesterday, after a Federal Reserve official said the central bank may slow the pace of stimulus as early as this summer amid disappointing economic reports.

Wal-Mart Stores Inc. lost 2.2% after the world’s largest retailer forecast second-quarter profit that was less than analysts estimated as the slow U.S. economy and higher taxes put pressure on consumers. Cisco Systems Inc. surged 13% after reporting fiscal third-quarter profit that topped estimates. Tesla Motors Inc. jumped 10% as it plans to sell as much as $830 million in shares and debt.

The S&P 500 fell 0.4% to 1,651.82 at 3:36 p.m. in New York. The Dow Jones Industrial Average dropped 33.84 points, or 0.2%, to 15,241.85. Trading of S&P 500 stocks was 11% higher than the 30-day average at this time of day.

“Today’s disappointing economic reports will set the tone,” Chad Morganlander, a Florham Park, New Jersey-based fund manager at Stifel Nicolaus & Co., which oversees about $130 billion, said by phone. “The U.S. economy is still struggling with lackluster growth and the recovery is far from self-sustaining, so equity markets are looking for guidance from central banks for their liquidity high.”

The U.S. bull market has entered its fifth year. The S&P 500 has surged 144% from a 12-year low in 2009, driven by better-than-estimated corporate earnings and three rounds of bond purchases from the Federal Reserve.

Bond Buying

Equities extended losses this afternoon as Fed Bank of San Francisco President John Williams said the central bank may begin slowing the pace of its $85 billion in monthly bond-buying amid signs the economy is gradually gaining strength.

“We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer” and end the program late this year, Williams said today in the text of a speech in Portland, Oregon.

Fed Chairman Ben Bernanke has said he would continue unprecedented stimulus until the jobless rate falls to 6.5% or inflation rises above 2.5%.

Jobless claims jumped by 32,000 to 360,000 in the week ended May 11, the most since the end of March, Labor Department figures showed today. Another report showed the cost of living in the U.S. fell in April for a second month, the first back-to- back declines in inflation since late 2008.

Housing Starts

Housing starts slumped 16.5% in April, the most since February 2011, the Commerce Department reported. Manufacturing in the Philadelphia region unexpectedly contracted in May for the first time in three months as new orders retreated and factories cut back on employment and hours.

The market’s rally has pushed 193 stocks in the Standard & Poor’s 500 Index, or 39% of the index, to their highest levels in at least 52 weeks, the most in Bloomberg data going back to 1993. The cumulative advance-decline line for stocks listed on the New York Stock Exchange, representing the number of daily gains minus declines, reached a record 63,856 yesterday.

Gains accelerate when corporate profits and the economy surprise a market dominated by skepticism, according to Laszlo Birinyi, president of Westport, Connecticut-based Birinyi Associates Inc. and among the first to advise buying U.S. stocks before the bull market began in 2009. He reiterated that the S&P 500 may climb 15% to 1,900 should it conform to bull markets that began in 1982 and 1990.

‘Going Up’

“Everything is going up, it’s not just tech or industrials or dividends,” Birinyi said today in an interview with Francine Lacqua and Guy Johnson on Bloomberg Television in London. “It’s not just central banks. Earnings are good, the psychology is people are fighting the tape,” he said. “Basically the psychology is, ‘I missed it.’”

The Chicago Board Options Exchange Volatility Index, or VIX, rose 2% to 13.07. The equity volatility gauge, which moves in the opposite direction to the S&P 500 about 80% of the time, has slipped 27% this year.

Nine out of 10 groups in the S&P 500 retreated today, with health-care and consumer discretionary shares dropping at least 0.9%.

Grocery Prices

Wal-Mart fell 2.2% to $78.07. Chief Executive Officer Mike Duke has cut prices on groceries and other necessities as the chain’s lower-income shoppers deal with elevated unemployment and increased Social Security taxes. First-quarter sales at U.S. Wal-Mart stores open at least 12 months fell 1.4%, the first drop after six straight gains. Analysts estimated a 0.1% decline.

The retailer forecast second-quarter profit will be $1.22 to $1.27 a share. Analysts had projected $1.29, the average of 24 estimates compiled by Bloomberg.

An index that tracks homebuilder stocks slumped 1.6% as all 11 members retreated. The gauge has gained 22% this year. PulteGroup Inc., the largest U.S. homebuilder by revenue, dropped 2.4% to $23.40. D.R. Horton Inc. lost 1.9% to $26.91.

Berkshire Hathaway Inc. Class B shares slid 0.8% to $111.81 after S&P lowered the company’s credit rating. S&P cut Berkshire to AA from AA+, saying the downgrade “better reflects our view of BRK’s dependence on its core insurance operations for most of its dividend income,” referring to Warren Buffett’s company by its ticker symbol.

AMD Slips

Advanced Micro Devices Inc., which makes semiconductors, slid 13% to $3.80. The stock has surged 58% since April 15, sparked by Sony Corp.’s decision to use AMD chips for the next version of its PlayStation console.

Technology shares rallied 1% as a group, with Cisco Systems surging 13% to $24. Cisco is benefiting as companies step up investments in data-traffic networks to accommodate users who are increasingly relying on smartphones and tablets to watch video and surf the Web.

Tesla Motors gained 10% to $93.48. The electric-car maker run by Elon Musk said in a U.S. regulatory filing that it will use the proceeds from selling 2.7 million shares, valued at $229 million at yesterday’s closing price, and $450 million in convertible senior notes due in 2018, to pay off a federal loan and fund other operations.

Kohl’s Corp. soared 4.6% to $51.98, the highest since November. The third-largest U.S. department-store chain reported first-quarter profit of 66 cents a share, while analysts surveyed by Bloomberg had estimated 57 cents on average.

Bloomberg News

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