Lowest close in S&Ps since August: Here's why

October 7, 2014 12:18 PM

U.S. stocks declined, with the Standard & Poor’s 500 Index slumping to an eight-week low, as the International Monetary Fund cut it growth forecast and warned of “frothy” equities amid signs of slowing growth in Europe.

The Russell 2000 Index of small companies retreated 1.7 percent, the most since July 31, to bring its loss since a March record to 11 percent. The Dow Jones Transportation Index plunged 2.5 percent today, capping a 3.6 percent drop in the past two days, the most since January. Auto stocks in the S&P 500 sank 3.4 percent to lead losses among all 24 industries.

The S&P 500 sank 1.5 percent to 1,935.09 at 4 p.m. in New York, the lowest level since Aug. 12. Today’s slide was the biggest in almost three weeks. Selling accelerated in afternoon trading as index futures contracts expiring in December slipped below 1,940, a level where two previous declines had ended earlier today.

“It’s definitely a risk-off day with ugly European data and growth concerns and I think we’re seeing some of that negative sentiment just getting ahead of itself here,” Mark Kepner, an equity trader at Chatham, New Jersey-based Themis Trading LLC, said by phone.

The Dow Jones Industrial Average lost 272.52 points, or 1.6 percent, to 16,719.39, the biggest retreat since July 31, as all but one of the 30 stocks in the gauge dropped. The Chicago Board Options Exchange Volatility Index jumped 13 percent to 17.43 today, the highest since March 14.

Safety Assets

Treasuries rose, with yields on 30-year notes falling to the lowest level since May 2013, and gold advanced a second day as the lower IMF forecast and subdued inflation fueled demand for safety assets.

The IMF also warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels.

The S&P 500 has fallen 3.8 percent from a record reached Sept. 18 as the Federal Reserve remains on track to end bond purchases this month. The gauge is up 4.7 percent this year and has not slid more than 10 percent in three years. The Dow’s decline today trimmed its gain in 2014 to 0.9 percent.

According to the IMF report, a sustained period of policy interest rates near zero in advanced economies has raised the risk that some financial markets may be overheating. The S&P 500 nearly tripled during a 5 1/2 year bull market fueled by better- than-estimated corporate earnings and three rounds of Feb bond purchases.

European Stocks

The IMF warning comes three months after the Fed said prices were stretched in some small-cap and biotechnology shares. Since then, the Nasdaq Biotechnology Index has rallied 5.7 percent, while the Russell 2000 has fallen 6.7 percent.

European shares plunged to a seven-week low today as data showed German industrial production fell the most since 2009, underscoring the risk of slowdown in the region’s largest economy as concern grows that the European Central Bank’s stimulus won’t be enough to boost inflation and revive the economy.

Travel stocks sank as health officials in Spain isolated two people to see if they’re infected with Ebola after a Madrid nursing assistant became the first person outside Africa to be diagnosed with the viral illness.

“A combination of not-perfect economic data and some geopolitical risk has put doubt in some investors’ minds and that brings some volatility,” Dan Curtin, the Boston-based global investment specialist at JP Morgan Private Bank, said in a phone interview. “The dollar surge, Hong Kong protests, Ebola scare and weakening oil prices, somewhere circled together in those things is the root of this recent pullback.”

Strong Dollar

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, rallied for seven weeks and closed at a four-year high on Oct. 3 as investors speculated on the timing of an interest-rate increase by the Fed. West Texas Intermediate oil fell below $90 a barrel last week for the first time in 17 months.

Investors will turn to corporate reports for clues on the strength of the U.S. economy amid concern that slowing global growth and the strong dollar will hurt large companies that do business overseas.

Alcoa Inc. unofficially starts the earnings season after tomorrow’s close. Profit at companies in the S&P 500 rose 4.9 percent in the July-September period, according to the average estimate of analysts in a Bloomberg survey.

“We don’t have earnings data to drive us yet this week and let’s face it, that’s the meat and potatoes of the market,” Karyn Cavanaugh, the New York-based senior market strategist at Voya Investment Management LLC, said in a phone interview.

Rate Forecasts

The Federal Open Market Committee will release minutes from its Sept. 16-17 meeting tomorrow. Investors have been concerned the central bank may raise interest rates sooner than anticipated as the U.S. economy gains strength.

Forecasts for the Fed to raise interest rates in mid-2015 are “reasonable” as policy makers wait for unemployment to fall further and inflation to rise, New York Fed President William C. Dudley said today.

“It still is premature to begin to raise interest rates,” Dudley said today in a speech in Troy, New York. “The labor market still has too much slack and the inflation rate is too low.”

All of the 10 main S&P 500 groups declined today, with industrial shares sliding 2.4 percent to pace gains. AGCO Corp. sank 11 percent. The world’s third-largest maker of agricultural equipment cut its full-year forecast because of lower sales in all regions and the stronger dollar.

Industrial Stocks

Caterpillar Inc. slid 3.4 percent for the steepest drop in the Dow, while competitor Deere & Co. sank 3.4 percent and United Rentals Inc. plunged 7.3 percent.

Financial stocks in the S&P 500 sank 1.8 percent.

Delta dropped 1.2 percent and United Continental Holdings Inc. fell 1.9 percent as carriers declined. The Bloomberg U.S. Airlines Index slid 1 percent.

Kosmos Energy Ltd. lost 5.2 percent after saying Blackstone Group LP and Warburg Pincus LLC, its largest shareholders, will sell 15 million shares. The company said it won’t receive any proceeds.

GT Advanced Technologies Inc. rose 52 percent. The maker of lab-grown sapphire used in mobile-device screens plunged 93 percent yesterday after filing for bankruptcy.

Keurig Green Mountain Inc. rose 4.9 percent for the second- biggest gain in the S&P 500. The stock advanced after Goldman Sachs Group Inc. opened coverage of the company with a buy rating.

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