S&P 500 Falls Most Since November Amid Concern Over Valuations

Monday, 13 January 2014 04:17 PM

Jan. 13 (Bloomberg) -- U.S. stocks fell, sending the Standard & Poor’s 500 Index toward its biggest loss in two months, amid concern over valuations after benchmark indexes rallied to all-time highs in 2013.

Lululemon Athletica Inc. slumped 16 percent after the sportswear maker lowered its profit and sales forecast. Intercept Pharmaceuticals Inc. plunged 20 percent after the stock soared sixfold last week. Twitter Inc. rose 1.6 percent after Goldman Sachs Group Inc. analysts raised the stock’s 12- month price target. Beam Inc. jumped 24 percent after Suntory Holdings Ltd. said it will acquire the spirits maker in a $16 billion deal.

The S&P 500 fell 1.3 percent to 1,818.04 at 3:32 p.m. in New York. The Dow Jones Industrial Average declined 179.78 points, or 1.1 percent, to 16,257.27, its lowest level of the year. Trading in S&P 500 stocks was 25 percent above the 30-day average at this time of day.

“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.”

The S&P 500 has dropped 1.6 percent so far in 2014, despite last week’s 0.6 percent advance. It ended last year at a record level, having climbed 30 percent for its biggest annual rally since 1997.

‘Lofty’ Valuations

Valuation for the S&P 500 is “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 benchmark index trades at 15.4 times the estimated earnings of its members, more than the average multiple of 14.1 over the last five years, data compiled by Bloomberg show. The gauge ended 2013 at its highest valuation since the end of 2009.

“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 Television. “Those really are the fundamental drivers of the level of U.S. equity markets this year.”

JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs, and Citigroup Inc. are among 29 members of the S&P 500 to report quarterly results this week. 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.

Fed Comments

Stocks extended declines today after Fed Bank of Atlanta President Dennis Lockhart said the U.S. economy is on “solid footing” and he would support continued cuts to stimulus.

Three rounds of monetary stimulus from the Fed have helped push the S&P 500 higher by 169 percent from a 12-year low in 2009. The Fed, which next meets Jan. 28-29, last month announced a reduction in its monthly bond-buying program, citing a recovery in the labor market.

The S&P 500 increased on Jan. 10 after a report from the Labor Department showed employment rose in December at the slowest pace in almost three years. The data ended months of improving job growth that had signaled the world’s largest economy was picking up.

“It sounds as if the Fed is staying on its course of tapering,” John Carey, a fund manager at Boston-based Pioneer Investment Management Inc., said in a telephone interview. His firm manages about $220 billion worldwide. “Whatever mixed signals could have come from the jobs numbers, they’re looking at the overall picture.”

Volatility Index

The Chicago Board Options Exchange Volatility Index, which measures expected swings on the S&P 500 using options prices, rose 10 percent to 13.35. The gauge fell 12 percent last week to its lowest level since Aug. 5.

All 10 main industries in the S&P 500 declined, with financial, energy and consumer-discretionary companies dropping more than 1.5 percent.

Lululemon slumped 16 percent to $49.77, the lowest level in two years. The yogawear retailer cut its revenue and earnings forecast for its fourth quarter ending Feb. 2. Lululemon joins retailers from L Brands Inc. to Family Dollar Stores Inc. that have cut forecasts this month in the wake of a margin-eating price war this holiday season.

Vancouver-based Lululemon has been trying to win back customers after being forced to recall pants last year for being too sheer and has struggled to overcome supply-chain delays as it expands overseas and fends off growing competition.

Intercept Drops

Intercept plunged 20 percent to $356.52. Chief Executive Officer Mark Pruzanski said he may need the help of a larger drugmaker to bring the company’s experimental liver-disease treatment to market.

The stock soared 545 percent last week after a trial of the drug worked well enough for the testing to be stopped.

Symantec Corp. fell 4.8 percent to $22.34 after Morgan Stanley lowered its rating on the stock to underweight from equal weight. The brokerage predicted that revenue would rebound more slowly as Symantec reorganizes its sales force, potentially limiting its profitability.

Twitter rose 1.6 percent to $57.93. Goldman Sachs analyst Heath Terry raised the stock’s price target to $65 a share from $46, citing Twitter’s “significant acceleration” in innovation during the fourth quarter.

Analyst Downgrades

Twitter has seen five trading sessions of declines, falling 17 percent last week as the microblogging service was hit with analyst downgrades and Cowen & Co. initiating coverage of the stock with the equivalent of a sell rating.

Beam jumped 24 percent to $83.29, an all-time high. Osaka- based Suntory, the maker of Yamazaki whiskey and the Premium Malt’s beer, is seeking to boost overseas growth by gaining brands such as Maker’s Mark whiskey, Jim Beam and Canadian Club liquor.

Suntory will pay $83.50 per share in cash and take over all of Beam’s outstanding debt, according to a joint statement. The companies said they expect to complete the deal by the end of June. The deal, once completed, will create the world’s third- largest premium spirits company.

Juniper Networks Inc. climbed 9 percent to $25.66, the highest level since July 2011. The maker of computer-networking equipment has been targeted by activist hedge fund Elliott Management Corp., run by billionaire Paul Singer, which will seek cost cuts, stock buybacks and other changes, two people familiar with the matter said.

Elliott is seeking talks with management and the company’s board, the people said.

Merck & Co. surged 6.6 percent to $53.17, the highest level in six years. The second-largest U.S. pharmaceuticals company said it will seek early approval of a new cancer treatment and decide the future of the company’s animal health and consumer businesses this year.

--With assistance from Sofia Horta e Costa in London. Editor: Jeff Sutherland

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

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

© Copyright 2018 Bloomberg News. All rights reserved.

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S&P 500 Falls Most Since November Amid Concern Over Valuations
Monday, 13 January 2014 04:17 PM
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