U.S. Stocks Drop a Fourth Straight Week on Concern Over Europe

Feb. 6 (Bloomberg) -- U.S. stocks fell a fourth straight week, the longest streak since July, as concern grew that widening budget deficits in Europe will slow the economic recovery. A 167-point rally in the Dow Jones Industrial Average during the final hour of trading failed to erase losses.

Merck & Co., Coca-Cola Co. and 3M Co. fell more than 2 percent to help lead declines in the Dow average, which briefly sank below 10,000 for the first time since November. MasterCard Inc. tumbled 12 percent and Pfizer Inc. lost 3.8 percent after posting earnings that missed the average analyst estimate. Boeing retreated 3.6 percent after saying a demand slump may last at least two more years.

The Standard & Poor’s 500 Index lost 0.7 percent to 1,066.19, bringing its 2010 retreat to 4.4 percent. The Dow average slumped 55.10 points, or 0.6 percent, to 10,012.23. While both measures reversed course yesterday to post gains, their slumps during the past month are the biggest since March.

“The extension of this downturn has been caused by something very similar to what we saw during the financial crisis,” said Jeffrey Kleintop, who helps oversee about $280 billion as chief market strategist at LPL Financial in Boston. “Whether we’re feeling aftershocks of the crisis or whether this is sign of a new crisis in development, the jury is still out.”

Budget Deficits

Investors have bet that Portugal, Spain and Greece may be unable to control their budget deficits, driving money into assets they consider safer. European Central Bank President Jean-Claude Trichet has struggled to convince investors the euro region shouldn’t be punished for Greece’s budget problems. As Greece tries to control a record deficit and stem a slide in its bonds, Trichet said the economy of the 16-nation euro area is solid and its budget shortfall will probably be smaller than those of the U.S. and Japan this year.

Utilities, financial institutions and health-care companies in the S&P 500 retreated more than 1.6 percent for the biggest declines among 10 industries.

Equities declined for most of the day yesterday even after the U.S. Labor Department said the unemployment rate fell to a five-month low of 9.7 percent in January. The S&P 500 and Dow turned positive for the day amid speculation the European Union may propose a solution for Greece’s budget deficit.

The stock market will be “flat,” or almost unchanged, through the end of the year, New York University professor Nouriel Roubini said yesterday in a Bloomberg Television interview.

‘Just a Precursor’

The largest stock market decline in 11 months may worsen amid persistent U.S. joblessness and economic growth that trails analysts’ forecasts, said Mohamed A. El-Erian, whose Pacific Investment Management Co. runs the world’s biggest mutual fund.

Investors have wrongly priced in an “orderly” withdrawal of stimulus measures, a rebound in bank lending and coordinated government policy to restore growth, the chief executive officer of Newport Beach, California-based Pimco wrote in a Bloomberg News column. That means Wall Street projections for gains in 2010 may prove incorrect and prices will slump, he said.

“Investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes,” El-Erian, 51, wrote. “The global financial crisis has undermined growth and job creation; it has clogged many of the pipes that allocate funds to productive uses; and it has rapidly taken public debt and the budget deficit to worrisome levels.”

Earnings Reports

A record nine-quarter earnings slump is projected by analysts to have ended in the fourth quarter with a 78 percent increase in S&P 500 profits. More than 60 companies in the index are scheduled to release results next week, including Coca-Cola Co., Pulte Homes Inc. and Sprint Nextel Corp.

“The earnings continue to be spectacular,” said Henry Herrmann, chairman and chief executive officer of Waddell & Reed Financial Inc., which manages $67 billion. “There’s profit margin improvement everywhere you look. But if you don’t create jobs people are not going to be comfortable that what’s happening can be extrapolated.”

The rebound in spending that gave U.S. retailers a lift during the holiday season probably carried over into the new year, signaling consumers may contribute more to growth, economists said before reports next week.

Airgas Inc. soared 44 percent, the biggest gain in the S&P 500, to $60.96. Air Products & Chemicals Inc. said it may take a $5.1 billion cash offer to buy the company straight to shareholders after its rival privately spurned two prior attempts to create the largest U.S. industrial gas company.

Lexmark International Inc., the second-largest U.S. printer maker, climbed 25 percent to $32.26 after forecasting at least 29 percent more first-quarter profit than analysts estimated on average.

Berkshire Hathaway Inc.’s Class B shares fell 3.7 percent to $73.57 after Warren Buffett’s insurance and investment company was stripped of its last AAA credit rating by S&P.

To contact the reporter on this story: Craig Trudell in New York at ctrudell1@bloomberg.net.