Most U.S. stocks fell, after benchmark indexes climbed to record levels last week, even as government data showed retail sales unexpectedly rose in April.
Yum! Brands Inc. fell 2.1 percent after the owner of the KFC and Pizza Hut dining chains reported a slump in April sales in China. Corning Inc. (GLW) climbed 0.9 percent as analysts raised their recommendation for the shares. Theravance Inc. rose 18 percent after Elan Corp. agreed to pay $1 billion for a share in royalties on new drugs.
The Standard & Poor’s 500 Index (SPX) rose less than 1 point to 1,633.77 at 4 p.m. in New York. The Dow Jones Industrial Average slid 26.81 points, or 0.2 percent, to 15,091.68. Almost 5.3 billion shares traded hands on U.S. exchanges today, or 16 percent below the three-month average, as about seven stocks declined for every five that advanced.
“It’s obvious that this market has got legs, the question is whether the economy is going to grow some legs to support stocks going forward,” Frank Braddock, senior portfolio manager with the Braddock Group of JHS Capital Advisors, said by phone from Columbia, South Carolina. JHS oversees about $3.4 billion.
The 0.1 percent increase in U.S. retail sales followed a 0.5 percent decline in March, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg called for a 0.3 percent drop. A separate report showed companies in the U.S. unexpectedly held inventories in check in March as sales fell by the most in nine months, an indication orders will rise as demand picks up.
Overseas, Israel’s central bank cut its benchmark rate 25 basis points to 1.5 percent, joining a wave of monetary easing spanning from the U.S. to Europe. In China, the world’s second-largest economy, fixed-asset investment unexpectedly decelerated last month while industrial output trailed estimates.
Tax Increases
“It seems consumers have been able to absorb the tax increases better than most had thought, but we still need to see if we can come out of this second-quarter purgatory,” Ron Florance, the Scottsdale, Arizona-based managing director of investment strategy at Wells Fargo Private Bank, which has $170 billion assets under management, said in a phone interview. “Israel surprised with their rate drop and everyone around the world is now doing easy money, so the pedal is to the metal at the global level.”
The S&P 500 rallied to a record on May 10, capping a third week of gains and extending its advance so far this year to 15 percent. U.S. stocks climbed last week as companies from Walt Disney Co. to DirecTV beat earnings estimates and central banks worldwide stepped up monetary stimulus to boost growth.
Volatility Index
The Chicago Board Options Exchange Volatility Index, or VIX, fell 0.3 percent to 12.55. The equity volatility gauge is down 30 percent for the year.
Seven out of 10 (SPXL1)industries in the S&P 500 retreated as phone stocks and raw-material producers declined the most, while health-care companies had the largest gains as a group. Peabody Energy Corp. slumped 4.1 percent to $20.14 for the biggest retreat in the S&P 500, followed by losses of more than 3.4 percent in Joy Global Inc. and U.S. Steel Corp.
Yum slid 2.1 percent to $68.92 after the company reported a 29 percent drop in sales at stores open at least 12 months in China as the spread of bird flu hurt demand. Analysts projected a 27 percent drop, the average of five estimates compiled by researcher Consensus Metrix. Sales dropped 36 percent at KFC while gaining 5 percent at Pizza Hut.
AutoZone Inc. slipped 1.2 percent to $415.76. The retailer of automotive replacement parts and accessories was downgraded to hold from buy at Deutsche Bank AG with a 12-month price estimate of $410 a share.
Mosaic Buybacks
Mosaic Co. lost 3.1 percent to $61.30. The world’s largest producer of phosphate crop nutrients said it favors share buybacks over dividends to redeploy surplus cash. With an estimated $2 billion of cash by the end of the month, Mosaic is assessing its ability to buy back shares while seizing growth opportunities and maintaining a “solid” investment-grade credit rating, Chief Financial Officer Larry Stranghoener said today on a conference call.
Corning (GLW) rose 0.9 percent to $15.24 after Barclays Plc raised its recommendation for the shares to overweight, the equivalent of a buy rating. Morgan Stanley also upgraded the maker of glass for flat-panel televisions to equal weight, a level similar to hold, from underweight.
Theravance Rallies
Theravance jumped 18 percent to $41.20 after Elan agreed to buy a share of drug royalties that Theravance will receive from GlaxoSmithKline Plc. The Irish drugmaker will receive 21 percent of royalties earned by Theravance on four respiratory drugs, and 20 percent of that income will be paid to Elan shareholders as a dividend.
J.C. Penney Co. rose 2.9 percent to $18.24. The department-store chain that replaced its chief executive officer last month set a lender meeting for tomorrow to discuss a $1.75 billion loan, according to a person with knowledge of the matter who asked not to be identified because the deal is private. CEO Myron Ullman is working to improve sales after revenue last year tumbled 25 percent to $13 billion amid Ron Johnson’s failed attempt to remake the retailer.
The S&P 500 has climbed to record highs on seven of the last eight trading days. Oppenheimer & Co.’s John Stoltzfus raised his year-end target for the index to 1,730 today from 1,585, ranking him as the second-most bullish strategist on Wall Street after Canaccord Genuity Securities LLC’s Tony Dwyer, who has a 1,760 estimate on the benchmark index.
Bull Market
Returns from the U.S. equity bull market that started four years ago are matching those from the last half of the 1990s even as valuations are 28 percent lower.
The S&P 500 has gained 26.2 percent annually including dividends since March 2009, the same as during the last 50 months of the technology bubble, according to data compiled by Bloomberg. Shares in the index now trade at 18.6 times annual profit, below the average 25.7 multiple in the 1990s rally led by Internet companies.
For bulls, the valuations show stocks will keep rising after the S&P 500 advanced 164 percent as individuals scarred by the worst financial meltdown since the Great Depression return to equities. Bears say the price-earnings ratios mean investors lack confidence in the economy and corporate profit growth. They also note that the last time returns were this high, the bubble popped and more than $5 trillion was erased from the value of U.S. stocks, according to data from the World Bank.
“The size of this rally’s not what keeps me up at night,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees about $170 billion, said in a May 8 phone interview. “That was a tremendous rally then, too, but I’m not getting all nervous based on the size of the rally this time, because we’re not there yet in terms of valuation.”
U.S. Stocks Decline After Record Highs Amid Retail Sales Data
Scott Eells/Bloomberg
The figures may prompt economists to forecast spending this quarter will cool less than previously projected as Americans overcome a January increase in the payroll tax.
The figures may prompt economists to forecast spending this quarter will cool less than previously projected as Americans overcome a January increase in the payroll tax. Photographer: Scott Eells/Bloomberg
May 13 (Bloomberg) — Gina Martin Adams, an equity strategist at Wells Fargo Securities LLC, talks about U.S. stocks, retailers and corporate earnings.
She speaks with Tom Keene, Sara Eisen, Alix Steel and Michael McKee on Bloomberg Television’s “Surveillance.” (Source: Bloomberg)
NEW YORK — The Dow Jones industrial average has barreled to an all-time high, erasing $11 trillion of losses racked up when the financial crisis began five years ago.
The stock market’s revival — with the Dow at a record 14,253.77 — has some respected minds on Wall Street suggesting the Dow will puncture 20,000 in just a few years. But, as investors may recall, the last few times the stock market seemed headed for records, disaster soon followed.
High-flying tech stocks led to highs in 2000 just before the bubble burst. The rally that ended in 2007 was followed by the worst economic downturn since the Great Depression.
So what’s different now?
Corporate America is raking in bigger profits, stock prices are relatively cheap, and the Federal Reserve‘s easy-money policies have pushed interest rates to record lows.
“Earnings are going to re-accelerate this year, and over the next four years really see a pretty substantial increase … and that’s what’s going to drive us to Dow 20,000,” said Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. “The harder thing for people to really believe is that earnings could grow faster, but that’s really going to provide a lot of legs to this rally.”
Even if average investors remain wary of the stock market, Fed policies have left them with precious few opportunities to earn returns on their savings. The latest jump in the Dow came after a confluence of economic reports pointed to a healthy U.S. service sector, strong retail sales in Europe and steady growth in China.
Investors have also been emboldened as U.S. policymakers signaled they would continue the central bank’s monetary stimulus programs. That means interest rates will probably remain near historic lows for perhaps a couple more years, and in the process pump billions of dollars into the financial system. That would prop up the real estate market and make stocks look more attractive.
Investors sent the Dow up more than 7,700 points after the index hit a recent low of 6,547.05 in 2009. And the most recent rally sent it 90 points north of its previous closing record half a decade ago. The new record does not include the effect of inflation. Adjusted for inflation, the index would have to reach 15,502 to match its old record.
Broader stock indexes have also been hovering near all-time records. The Wilshire 5000 Total Market Index, the broadest barometer of stocks, started hitting new highs in late January.
The benchmark Standard & Poor’s 500 index neared its Oct. 9, 2007, all-time high on Tuesday, adding 14.59 points, or 0.96%, to close at 1,539.79. The Nasdaq gained 42.10 points, or 1.32%, to 3,224.13. Though the index is trading at a 12-year high, it is still about 36% from its best close of 5,048.62, reached at the height of the tech bubble in March 2000.
Much of Wall Street’s new optimism is pinned to the prospects of profit growth. That might seem peculiar considering some big companies are ratcheting down their projections for 2013, including economic powerhouses such as Wal-Mart Stores and Federal Express.
Wall Street analysts have notched down their expectations for corporate profit growth since the start of the year. Although earnings of the average company in the S&P 500 are expected to grow 7.6% this year, down from a projected 10% in early January, that would still be higher than last year’s 4.5% rise in profit, according to S&P Capital IQ.
Per-share earnings for the average company in the S&P 500 are on track to break a record this year, according to S&P Capital IQ. That’s a sharp contrast to late 2007, when corporate profits started to nose-dive just ahead of the financial meltdown.
As a result, strategists at major Wall Street firms such as Goldman Sachs and BlackRock are predicting stocks could gain an additional 4% by the end of 2013.
Some market optimists wouldn’t be surprised if the Dow broke 15,000 by year’s end. A climb to 20,000 over the next four years seems possible to some — a prediction that may seem ridiculous to investors still feeling the sting of the financial crisis.
“The economy is going to improve by the end of the year, and people are going to be moving out of bonds and moving into stocks,” said Jeremy Siegel, finance professor at the University of Pennsylvania’s Wharton School.
He sees a 50-50 chance the Dow could land between 16,000 and 17,000 by year’s end. Hitting 20,000 within the decade isn’t out of the question either, he said.
“It’s certainly not impossible that it will get there in the next four years,” he said. But, he added: “There’s a lot of things that can happen in that period of time.”
Some of the biggest worries include what happens if the Fed begins to raise interest rates. Those low rates have made bonds extremely cheap to issue, and companies have used that money to buy back shares and acquire other companies — pushing up stock prices despite less-than-stellar economic growth.
NEW YORK — When it comes to big, round numbers with major investment significance, 14,000 is as big as it gets for the Dow Jones industrial average.
Indeed, Dow 14,000 is back in play and in the headlines after the iconic 117-year-old blue chip index topped that lofty milestone Friday for the first time since October 2007.
The move pushed the world’s best-known stock gauge up 149.21 points to close at 14,009.79, for its best level since the 2008 financial crisis. The benchmark index is not far from its Oct. 9, 2007, all-time high of 14,164.53 and the move is prompting talk of a new peak, and even Dow 15,000.
The Dow is now up 6.9% in 2013 and has rallied 114% since the bear market low in March 2009.
The Dow’s heady rush to levels not seen in more than five years, and potentially to heights it has never seen before, has elicited feelings of renewed hope and cautious optimism on Wall Street.
The sense of optimism comes from the fact that the Dow’s rise is reflecting a growing belief that economies, both in the U.S. and around the world, are in a better place and on the road to recovery. Any signs of a sustainable economic recovery will also prove bullish for corporate profitability at a time when U.S. companies in the Standard & Poor’s 500 stock index are already on track to post record earnings-per-share of $103.40 in 2012.
“This is just the beginning,” says Jeremy Siegel, a finance professor at the Wharton School of Business at the University of Pennsylvania. He sees the Dow hitting 15,000 or even higher by the end of the year. “I think this is going to be a 20%-plus year for stocks.”
Siegel says with cash yielding 0% and 10-year U.S. Treasury notes paying roughly 2% in interest, investors have little alternative other than to buy stocks in search of bigger gains. “Where else are they going to go for returns,” says Siegel.
Main Street investors now have $2.4 trillion parked in money market funds, $6.7 trillion in bank savings accounts and $633 billion in low-yielding certificates of deposit, according to Peter Crane, publisher of Money Fund Intelligence, citing Federal Reserve data.
The lingering skepticism on the part of some investors comes from the knowledge that Dow 14,000 is an area where the stock market topped out in 2007 and a level that has acted more like a ceiling for stock prices, rather than a floor.
In fact, the Dow only closed above 14,000 on nine trading days in 2007, including its first-ever close above that psychologically important number on July 19, 2007.
It is not an overstatement to say that Dow 14,000 is the biggest round number the Dow has ever had to hurdle in its long history.
“Rarified territory is a good way to describe it,” says Jamie Farmer, managing director at S&P Dow Jones Indices.
And the thinner the air, the tougher the slog.
“We are back to levels where the market has had trouble sustaining highs in the past,” says Richard Moroney, editor of Dow Theory Forecasts newsletter.
While the Dow has a good shot at hitting a new high in 2013, it’s more likely it will stop going straight up soon and settle into a range that will keep it trading around 14,000 for most of the year, cautions Jeff Kleintop, chief market strategist at LPL Financial. He notes that the blue-chip gauge got off to a rip-roaring start last year and quickly climbed to 13,000 before stalling and not breaking out for good until December.
“Whenever we get to these big milestones,” says Kleintop, “it seems to take the market a better part of a year to digest those gains.”
A further massive run-up for the Dow right now seems unlikely because the market still will have to confront falling earnings estimates later in 2013 and more turbulence in Europe ahead of key German elections in the fall, Kleintop says. Wall Street analysts expect double-digit earnings growth in the final two quarters of this year, according to Thomson Reuters. But Kleintop says those lofty estimates will have to come down due to a still-weak global economy. Fourth-quarter 2012 earnings are estimated go grow 3.8%, Thomson Reuters says. And 68% of the nearly half of companies in the S&P 500 that have reported have topped forecasts, which is better than the 62% long-term average.
Frank Fantozzi, president and CEO of Planned Financial Services, an independent wealth management firm, is also preaching caution to his high-net-worth clients. “We’re being very cautious now,” he says, adding that he expects virtually zero economic growth in the first three months of 2013 as the nation adjusts to higher taxes and less government spending.
“If we get zero GDP growth in the January through March quarter, there is no way the Dow will be still at 14,000,” says Fantozzi. He says he wouldn’t be surprised if the Dow suffered a 3% to 5% price correction.
He also doesn’t believe the early signs in 2013 of Main Street investors putting their money back into the stock market will prove long-lasting. Individual investors poured $16.1 billion into U.S.-stock mutual funds in the three weeks ended Jan. 23, according to the Investment Company Institute, the mutual fund industry trade group.
But Fantozzi’s view is that this is more of a sign of investors who fled the market late in 2012 amid “fiscal cliff”-related fears returning to stocks, debunking the bull-driven theory of a flood of new money entering the market.
“It’s people buying back in after getting out last quarter,” he says. More than $9 billion exited domestic stock mutual funds in the week ended Jan. 2.
But records are meant to be broken, and there are reasons why the Dow has been rising and a case to be made that the rally has room to run, and a new record high is within reach.
The Dow’s move up, Farmer says, has been driven by a growing belief that headwinds, such as the subpar economy, the November elections, fiscal issues and Europe’s debt woes, are diminishing. In short, it says things are getting better.
“What’s driving the market narrative right now is a burgeoning sense of recovery and confidence,” says Farmer. “The Dow is emitting a signal that sentiment is on the rise.”
The Dow’s long reputation for reflecting the national mood and acting as a leading economic indicator also bodes well, he says.
“The Dow provides historical touchstones,” says Farmer. “When Americans hear the number of points the Dow is up or down, their minds immediately translate that. The 14,000 number has a reference quality to it and has enormous value in itself.”
Since its last high in October 2007, the Dow has been powered higher by home-improvement retailer Home Depot, up 99%, IBM, up 73% and fast-food chain McDonald’s, up 67%.
One benefit of the Dow’s positive news is that investors who have been sitting out the rally, either in cash or bonds, might start funneling more of that so-called “safe money” back into stocks, says Moroney.
“If we can bust out to a new high it will add to the pain trade for those people who are underinvested in stocks,” says Moroney.
The Dow also looks attractive from a valuation standpoint, as the stock market is now trading at 14.5 times its trailing four-quarter earnings, a slightly cheaper price-to-earnings ratio than at its prior top in 2007. It sports a P-E that is 50% below where it was during the prior peak in 2000, according to S&P Capital IQ data.
Another plus is investors are far less exuberant than they were back in 2007, when stocks and real estate were flying high.
The so-called Dow Theory is also sending a bullish signal. In short when both the Dow industrials, which is made up of stocks that make stuff like computers and heavy earth- moving equipment, and the Dow transportation average, which is filled with companies that ship goods via rail, ship and trucks, are both in a major uptrend — as they are now — it suggests the market is in bull market mode.
While a correction can’t be ruled out, the fact the Dow is at five-year highs suggests it is decision time for investors.
“You can’t focus on the fact that you missed the rally,” says Moroney. “The fact that the Dow was at 6,547 in early 2009 is not relevant. The question is what do you want to do today?”
Moroney says stocks offer a better alternative than bonds and cash.
The economy in the U.S. unexpectedly came to a standstill in the fourth quarter as the biggest plunge in defense spending in 40 years swamped gains for consumers and businesses.
Gross domestic product dropped at a 0.1 percent annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department figures showed today in Washington. A decline in government outlays and a smaller gain in stockpiles subtracted a combined 2.6 percentage points from growth.
Rising auto sales led the advance in consumer spending last quarter as a drop in fuel prices and the largest income gain in four years enabled the biggest part of the economy to overcome superstorm Sandy and Washington budget battles. Little inflation and a stop-and-go expansion are why Federal Reserve policy makers, who wrapped up a two-day meeting today, pressed on with plans to pump more money into financial markets.
“I’m not going to say growth is particularly strong, but this is not a recessionary signal by any means,” said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts, whose team projected a 0.3 percent gain, the lowest in the Bloomberg survey. “This really was a story about a payback in national defense spending. Consumer- spending growth picked up, fixed investment was fairly strong.”
Stocks fell, dragging benchmark indexes from five-year highs. The Standard & Poor’s 500 Index declined 0.4 percent to 1,501.96 at the close in New York.
Europe Improves
The European economy, meantime, showed more signs of emerging from recession. A measure of executive and consumer sentiment in the euro area climbed in January to the highest level in seven months, figures from the European Commission in Brussels showed today.
The U.S. slowdown followed a 3.1 percent increase at an annual rate in GDP, the volume of all goods and services produced, in the third quarter when inventories jumped, government spending advanced and trade improved, providing almost mirror images of last quarter’s results.
The “statistical noise in the defense and inventory components” means it’s best to look at the average pace of growth over the second half of the year to get a better understanding, economists David Greenlaw and Ted Wieseman at Morgan Stanley in New York, said in a note. The resulting 1.5 percent “is right in line with the growth pace seen in recent years.”
Survey Results
The median forecast of 83 economists surveyed by Bloomberg called for a 1.1 percent gain in growth. Projections ranged from 0.3 percent to 2.1 percent. Today’s estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.
For all of 2012, the world’s largest economy expanded 2.2 percent after a 1.8 percent increase a year earlier.
Consumer spending, which accounts for about 70 percent of the economy, expanded at a 2.2 percent annual rate last quarter, up from 1.6 percent in the previous three months, today’s report showed. Purchases of durable goods, including automobiles, climbed at a 13.9 percent rate, the most in two years.
Cars and light trucks sold at a 15.3 million annual rate in December after a 15.5 million pace the prior month, the best back-to-back showing since early 2008, data from Ward’s Automotive Group showed earlier this month.
Incomes Jump
A jump in pay may have helped consumers. After-tax income rose at a 6.8 percent annual rate from October through December, the biggest increase since the second quarter of 2008, today’s report showed.
In addition to improving wages and salaries, some companies also paid dividends and employee bonuses earlier than usual before tax rates went up this year. The Commerce Department estimated that about $26.4 billion of the increase in incomes was attributable to early dividend payments and another $15 billion reflected bonuses and other types of irregular pay.
The gain in consumer spending may be difficult to sustain this quarter as a tax increase takes a bigger chunk from earnings. Congress on Jan. 1 let the payroll tax revert to 6.2 percent from 4.2 percent while avoiding broad-based income tax increases. Lawmakers are now wrangling over spending reductions scheduled for March 1 that threaten to further slow the economy.
Another report today showed companies took on more workers than projected in January, showing the labor market kept making progress at the start of the year. The 192,000 increase in employment, the most since February 2012, followed a revised 185,000 gain in December, according to figures from the Roseland, New Jersey-based ADP Research Institute.
Fed Action
A statement from Fed policy makers today indicated the central bank will continue its unprecedented balance-sheet growth to spur the economic expansion and reduce unemployment. The Federal Open Market Committee said it will keep purchasing securities at the rate of $85 billion a month.
The Fed repeated that the purchases will continue “if the outlook for the labor market does not improve substantially.”
“Although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook,” the FOMC also said.
The GDP report also showed price pressures remain contained, giving policy makers reason to stay the course. A measure of inflation, which is tied to consumer spending and tracked by Fed officials, climbed at a 1.2 percent annual pace compared with 1.6 percent in the prior quarter.
Corporate spending on equipment and software climbed at a 12.4 percent pace, contributing 0.86 percentage point to growth last quarter. It had declined at a 2.6 percent rate in the previous three months, the most in more than three years.
Housing Rebound
Residential construction increased at a 15.3 percent rate. For all of 2012, homebuilding climbed 11.9 percent, the best performance since 1992.
Gains in housing, a rebound in business investment and a pickup in global growth that are benefiting companies such as General Electric Co. (GE) will probably help underpin GDP this year.
General Electric’s fourth-quarter profit topped analysts’ estimates as demand in emerging markets fueled the aviation and health-care divisions, which helped build a record $210 billion order backlog for the Fairfield, Connecticut-based company.
“We saw real strength in the emerging markets and the developed regions stabilized,” Chief Executive Officer Jeffrey Immelt said on a Jan. 18 conference call. GE “entered 2013 with substantial momentum” following “solid order growth in five of the six businesses,” he said.
Government Outlays
Government outlays dropped at a 6.6 percent annual pace from October through December, subtracting 1.3 percentage points from growth, according to today’s GDP report. The decrease was led by a 22.2 percent fall in military spending that was the biggest since 1972, during the Vietnam War era.
Inventories grew at a $20 billion annual rate, down from a $60.3 billion pace in the third quarter. The pickup in consumer and business spending, combined with the effects of superstorm Sandy, which struck the East Coast in late October and caused widespread damage including shuttering businesses and destroying automobiles, may have restrained stock-building. The smaller gain in stockpiles cut GDP by another 1.3 percentage points.
To contact the reporters on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net; Michelle Jamrisko in Washington at mjamrisko@bloomberg.net
To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net
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