Tags: Stocks | Interest | Rate | Speculation

Stocks Retreat from Records Amid Interest-Rate Speculation

Monday, 07 July 2014 05:22 PM

U.S. stocks fell from record highs Monday, led by small companies, as investors weighed valuations and speculated the Federal Reserve may raise interest rates sooner than expected.

GT Advanced Technologies Inc. sank 16 percent after Canaccord Genuity Group Inc. downgraded the stock to hold from buy. Expedia Inc. slid 1.7 percent after agreeing to make a $658 million acquisition. Peabody Energy Corp. fell 3.7 percent to lead energy producers lower. PetSmart Inc. gained 2.5 percent after a second large shareholder prodded the company to consider selling itself.

The Standard & Poor’s 500 Index fell 0.4 percent to 1,977.65 at 4 p.m. in New York. The Dow Jones industrial average dropped 44.05 points, or 0.3 percent, to 17,024.21. The Russell 2000 Index of small companies slid 1.8 percent, the most since April. About 5.1 billion shares changed hands on U.S. exchanges, 14 percent below the three-month average. U.S. equities markets were closed Friday for the Independence Day holiday.

“Rates are going to go up before people expect,” Tom Stringfellow, president and chief investment officer of San Antonio-based Frost Investment Advisors LLC, which manages about $10 billion, said in a phone interview. “And when rates do go up, I expect some sort of a knee-jerk reaction. But I don’t believe for a moment that the Fed’s going to raise rates at a speed that derails this stable environment.”

Both the S&P 500 and the Dow average advanced 1.3 percent last week, with the 30-stock gauge closing above 17,000 for the first time, as monthly payroll addition exceeded 200,000 for a fifth month in June.

Rate Speculation

The Russell 2000 last week recovered nearly all its losses from a two-month selloff of Internet and small-cap shares, coming within a point of an all-time high.

Goldman Sachs Group Inc. brought forward its forecast for the Fed to raise interest rates, joining companies including JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in moving up estimates following the jobs data last week.

The central bank will increase its benchmark rate in the third quarter of 2015, rather than the first three months of 2016, Goldman Sachs Chief Economist Jan Hatzius wrote in a report yesterday.

Policy makers have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. The central bank will publish the minutes of its June 17-18 meeting on Wednesday.

Fed Chair Janet Yellen said on July 2 that concerns about financial stability shouldn’t prompt a change in current policy. Three rounds of monetary stimulus from the Fed and better than- forecast corporate earnings have driven the S&P 500 up more than 190 percent from its March 2009 bottom.

Equities Valuation

The equities benchmark is trading at 16.7 times the projected earnings of its members, higher than the five-year average multiple of 14.3. The Chicago Board Options Exchange Volatility Index, the measure known as VIX that tracks investors’ estimate of future volatility, slumped last week to the lowest level since February 2007. The gauge surged 9.8 percent to 11.33 Monday, the biggest gain since June 24.

“Valuations are pretty stretched, and we don’t see a lot of revenue growth, which might be negative for the market,” Bruce Bittles, chief investment strategist at Milwaukee-based RW Baird & Co., which oversees $110 billion, said in a phone interview. “There may be some concern about earnings, but this is basically a market being driven by an improving economy and guarantees by the Federal Reserve that they’re not going to raise interest rates.”

Alcoa Inc. will unofficially open the second-quarter earnings-reporting season Tuesday. Profit at companies in the S&P 500 increased 5 percent in the three months through June, estimates compiled by Bloomberg show.

Seven of the 10 main S&P 500 groups retreated Monday, with materials producers sliding 0.8 percent for the biggest loss.

Energy, Airlines

Peabody Energy fell 3.7 percent, as energy stocks lost 0.6 percent as a group. Chesapeake Energy Corp. dropped 4.6 percent as the price of natural gas posted the biggest one-day drop in four months in New York.

Delta Air Lines Inc. sank 4.4 percent to the lowest since April and United Continental Holdings Inc. fell 3.2 percent as airlines retreated.

GT Advanced Technologies dropped 16 percent to $16.50. Canaccord said the company is unlikely to get a boost in earnings in 2016 unless Apple Inc. uses its sapphire in all models of the iPhone.

Expedia fell 1.7 percent to $80.85. The online travel-booking service agreed Sunday to buy Australia’s Wotif.com Holdings Ltd. for about $658 million, seeking to expand its presence in the Asia-Pacific region.

Archer-Daniels-Midland Co. climbed 1.6 percent to $46.50. Miller Tabak + Co. raised its rating on the stock to buy from hold after ADM said it will acquire Wild Flavors GmbH for $3 billion. The takeover will help the world’s top corn crusher diversify from grain processing and gain a bigger foothold in overseas markets for food and beverages made with more natural raw materials.

PetSmart gained 2.5 percent to $68.95. Shareholder Longview Asset Management LLC sent a letter to the board of the pet- supply retailer today saying the company should consider a sale. PetSmart, under pressure from hedge fund Jana Partners LLC to pursue alternatives including a sale, said earlier it is reviewing changes to its capital structure to return more money to shareholders.

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U.S. stocks fell from record highs Monday, led by small companies, as investors weighed valuations and speculated the Federal Reserve may raise interest rates sooner than expected.
Stocks, Interest, Rate, Speculation
Monday, 07 July 2014 05:22 PM
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