U.S. Stocks Slump as S&P Cuts Nation’s Long-Term Credit Outlook

U.S. stocks slumped, sending benchmark indexes to their biggest declines in a month, after Standard & Poor’s Ratings Service cut the nation’s long-term credit outlook to negative.

Caterpillar Inc. (CAT) and United Technologies Corp. (UTX) sank at least 2.1 percent to help pace the declines in the Dow Jones Industrial Average. The Morgan Stanley Cyclical Index dropped 1.2 percent as 26 of its 30 stocks tumbled. Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) dropped more than 1.4 percent amid concern that China’s efforts to cool inflation will hurt the economy.

The S&P 500 declined 1.1 percent to 1,305.14 at 4 p.m. in New York, its biggest retreat since March 16. The Dow average tumbled 140.24 points, or 1.1 percent, to 12,201.59.

“There are a lot of structural issues that need to be dealt with,” said Mike Ryan, the New York-based chief investment strategist for Wealth Management Americas at UBS Financial Services Inc., which oversees $741 billion. “Anytime you see anything that suggests that the rating could be subject to downgrade, it’s perceived negatively. If this were to raise funding costs for the government, then it would weigh on economic prospects. It’s clearly not positive for companies.”

The S&P 500 had rallied 4.9 percent this year through April 15 amid higher-than-estimated corporate earnings and government stimulus measures. The Fed and U.S. agencies have lent, spent or guaranteed about $8.2 trillion to lift the economy from the worst slump since the Great Depression, according to data compiled by Bloomberg.

‘Negative’

S&P put a “negative” outlook on the U.S. AAA credit rating, assigning a one-in-three chance of a ratings cut in the next two years, because of rising budget deficits and debt.

“We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013,” New York-based S&P said in a report today. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

Under President Barack Obama’s fiscal year 2012 budget, released in February, the total debt subject to the ceiling would be $20.8 trillion in 2016. The plan House Republicans approved April 15, written by Budget Committee ChairmanPaul Ryan of Wisconsin, would need a debt ceiling of at least $19.5 trillion, according to data compiled by Bloomberg Government.

‘Fiscal Destiny’

“This is another indication of the need for the U.S. to better control its fiscal destiny, both for its sake and that of the global economy,” said Mohamed El-Erian, chief executive officer at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest manager of bond funds. “Absent credible medium-term fiscal reform, every segment of U.S. society would be faced with higher borrowing costs, a weaker dollar and a less bright outlook for employment, investment and growth.”

Barton Biggs, the hedge fund manager who bought stocks when the market bottomed in March 2009, said he’s still bullish on equities after S&P revised its credit outlook on the U.S.

“Have I changed my net long? Not really,” Biggs, who runs New York-based Traxis Partners LP, said in an interview today Bloomberg Television’s “Street Smart” with Carol Massar and Matt Miller. “Am I more disquieted than I was on Friday? Yeah, I guess I am.” U.S. indexes fell after the S&P made its announcement, which “immediately sends a warning to the politicians that there’s going to be dire consequences unless they get their acts together. We have a system of government that is painful but in the long run does the right things.”

Industrial Companies Slump

Industrial companies in the S&P 500 fell 1.3 percent. Caterpillar, the world’s largest maker of construction equipment, dropped 3.1 percent to $103.90. United Technologies slid 2.1 percent to $81.70.

Energy producers in the S&P 500 fell 1.5 percent, the biggest decline within 10 industries. Exxon slumped 1.4 percent to $83.10 and Chevron declined 1.6 percent to $104.50. Oil fell for the first time in four days in New York after Saudi Arabia, the world’s biggest exporter, said the global market has adequate crude supplies.

Gap Inc. (GPS) slumped 3 percent to $21.79 after Goldman Sachs reduced its rating on the shares to “sell” from “neutral” and said it sees long-term declines in comparable-store sales. Bank of America Corp. also reduced its recommendation, cutting the shares to “neutral” from “buy.”

China

The MSCI All-Country World Index of shares in 45 countries tumbled 1.6 percent and the Thomson Reuters/Jefferies CRB Index of raw materials retreated 0.9 percent. China increased banks’ reserve requirements to lock up cash and cool inflation, and central bank Governor Zhou Xiaochuan said monetary tightening will continue for “some time.”

Reserve ratios will rise a half point from April 21, the People’s Bank of China said on its website yesterday, pushing the requirement to a record 20.5 percent for the biggest lenders. The move came less than two weeks after an interest- rate increase. Zhou sees no “absolute” limit on how high reserve requirements can go, he said April 16.

Community Health Systems Inc. (CYH) slumped 4.4 percent to $30.50. The hospital operator said it is now offering $6 in cash for Tenet Healthcare Corp. (THC) Its previous offer was $5 in cash and $1 in stock. Tenet declined 2.6 percent to $6.49.

U.S. stocks may drop as the S&P 500 gathers downward momentum, dragging the gauge to the next support level of about 1,275, according to Credit Suisse Group AG. The moving average convergence/divergence, or MACD, indicator -- a measure used to identify changes to stocks’ momentum or direction -- has fallen since April 7, when the S&P 500 reached 1,333.51.

“Bearish medium-term momentum forces us to remain wary of an eventual break lower,” David Sneddon, the London-based head of technical analysis at Credit Suisse, wrote in a report to investors today.

To contact the reporters on this story: Rita Nazareth in Sao Paulo at rnazareth@bloomberg.net; Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Michael Regan at mregan12@bloomberg.net

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