U.S. stocks retreated, pulling the Standard & Poor’s 500 Index down from a two-week high, as Republicans and Democrats wrangled over separate plans to raise the federal debt limit and avoid a government default.
Phone companies led losses among 10 groups in the S&P 500, losing 1.4 percent. Kimberly-Clark Corp. (KMB) slipped 2.1 percent after reporting a decline in second-quarter profit, hurt by higher commodity prices. E*Trade Financial Corp. jumped 5.6 percent after agreeing to hire Morgan Stanley to explore a sale.
The S&P 500 fell 0.6 percent to 1,337.43 at 4 p.m. in New York after slumping as much as 1 percent. The index rallied to within 1.4 percent of a three-year high last week. The Dow Jones Industrial Average lost 88.36 points, or 0.7 percent, to 12,592.80 today.
“The market is trying to balance the macro risks of the debt ceiling negotiations and European contagion with good company earnings,” Rafi Zaman, managing director of global equities at DuPont Capital Management in Wilmington, Delaware, said in a telephone interview. His firm oversees about $26 billion. “The market is so volatile and moving depending on what’s in the forefront.”
Negotiations over the nation’s debt limit have whipsawed stocks. The S&P 500 jumped 1.6 percent on July 19, the biggest gain since March, amid optimism President Barack Obama and congressional Republicans would agree to raise the ceiling before the Aug. 2 deadline. Stocks fell the next day on concern a Senate plan to help the nation avoid default faced resistance from House Republicans.
Support for Greece
U.S. equities rallied last week as Europe pledged support for Greece to end the region’s debt crisis and companies from Apple Inc. to Morgan Stanley (MS) and Advanced Micro Devices Inc. beat earnings projections. The S&P 500 closed at 1,345.02 on July 22. When the measure climbed to 1,363.61 on April 29, it was the highest level since June 2008.
The S&P 500 Index (SPX) pared its decline to less than 0.1 percent from as much as 1 percent earlier today. Stocks resumed declines as Senator Charles Schumer criticized House Speaker John Boehner’s two-step plan to cut the federal deficit, fueling concern lawmakers were no closer to a compromise. The Republican plan would allow a debt-limit increase of $1 trillion, to be followed later by about $1.6 trillion, while larger spending cuts would be required.
‘Far From Perfect’
“This plan is far from perfect, but it adheres to our principles of ensuring that spending cuts are greater than any debt hike and it includes no tax increases,” Boehner, an Ohio Republican, said in a statement.
Top Senate Democrat Harry Reid readied a separate plan which would hand Obama the full $2.4 trillion in additional borrowing authority he has requested tied to $2.7 trillion in spending cuts that would leave Medicare and Medicaid untouched.
Both S&P and Moody’s are weighing a downgrade of the U.S. credit rating. Even if the country defaults on some obligations after Aug. 2 and pays bondholders, S&P said short- and long-term interest rates would rise by 0.50 percentage point and 1 point, respectively.
“Missing the Aug. 2 deadline would be a serious issue and could result in a ratings downgrade,” Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc. in Boston, wrote in an e-mail. “Though some politicians’ comments this morning are giving markets a sliver of hope that they actually get it done.”
Senate Bob Corker, a Tennessee Republican, said investors should “chill out” and not worry that Congress will allow a default to occur.
“I would sort of chill out and not worry so much anymore about the debt-ceiling issue,” Corker said on CNBC. “We have a lot of things that we know will keep us from ever defaulting on our debt.”
The S&P 500 erased 81 percent of its loss since April 29 through last week as corporate profits topped analyst estimates. Since July 11, 83 percent of S&P 500 companies that released quarterly results beat the average analyst earnings estimate, according to data compiled by Bloomberg. Between July 20 and July 22, analysts boosted estimates for S&P 500 income during the final three months of 2011 by 2.3 percent. That’s the biggest two-day increase for the quarter after the current one in data going back to 2006.
‘Cloud of Uncertainty’
“There are great companies that are making a ton of money underneath this cloud of uncertainty from the debt ceiling debate,” Frank Ingarra, who helps manage the CAN SLIM Select Growth Fund at Greenwich, Connecticut-based NorthCoast Asset Management LLC, said in a telephone interview. His firm oversees $1.5 billion. “Everyone’s conflicted over this politicking and that’s why we’re oscillating.” The S&P 500 Telecommunication Services Index sank 1.4 percent, the most among 10 industries within the S&P 500. Research In Motion Ltd. (RIM) dropped 4.4 percent to $26.67. The maker of the BlackBerry smartphone said it’s cutting 2,000 positions and Chief Operating Officer Don Morrison, currently on temporary medical leave, is planning to retire after 10 years with the company.
A gauge of consumer staples companies retreated 1 percent. Kimberly-Clark fell 2.1 percent to $66.48. The maker of Scott toilet paper and Huggies diapers said net income fell 18 percent. Chief Executive Officer Tom Falk is raising prices on most items the company sells in North America to make up for rising costs for pulp, oil and other raw materials. In April, it more than doubled its estimate for raw materials expense inflation for this year.
Lorillard Inc. (LO) fell 4.5 percent to $107.29. The cigarette maker reported second-quarter sales of $1.16 billion, missing the average analyst estimate of $1.17 billion in a Bloomberg survey.
Kroger Co. (KR) declined 1.9 percent to $24.82, while Safeway Inc. (SWY) slipped 2.1 percent to $20.50. Goldman Sachs Group Inc. cut its recommendation on the grocers to “sell” from “neutral,” citing the possibility of accelerating inflation.
Financial stocks lost 0.8 percent as a group. Bank of America dropped 1.2 percent to $10.01, while JPMorgan Chase & Co. (JPM) slumped 1.2 percent to $41.69.
Utility companies rose 0.3 percent for the biggest gain among 10 groups in the S&P 500. NRG Energy Inc. (NRG) climbed 2.7 percent to $25.41 after being upgraded to “buy” from “neutral” at Bank of America Corp. (BAC)
E*Trade rallied 5.6 percent to $16.52. The online brokerage plans to hire Morgan Stanley to explore a sale after its largest shareholder, Citadel LLC, said the company needed to take action to reverse “catastrophic losses” for investors.
The board of TD Ameritrade Holding Corp. (AMTD) plans to discuss a possible bid for E*Trade, the Wall Street Journal reported, citing people familiar with the matter. Kim Hillyer, a spokeswoman for TD Ameritrade, said it was the company’s practice not to comment on rumors or speculation. Ameritrade added 1.8 percent to $19.96.
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