U.S. Stocks Drop as Economy Concern Offsets Valuations; HP Falls
U.S. stocks fell, posting the fourth straight weekly slump for the Standard & Poor’s 500 Index, as the cheapest price-earnings ratios since 2009 failed to lure investors amid concern the global economy is weakening.
Technology and financial companies in the S&P 500 had the biggest losses among 10 groups, falling 2.8 percent and 1.9 percent, respectively. Hewlett-Packard Co. (HPQ) tumbled 20 percent, the most since 1987, after issuing forecasts that missed analysts’ projections and announcing strategic shifts that undermined confidence in management. Citigroup Inc. and JPMorgan Chase & Co. retreated more than 2.3 percent as a gauge of European banks sank to the lowest level since 2009.
The S&P 500 fell 1.5 percent to 1,123.53 at 4 p.m. in New York. It lost 4.7 percent this week and 16 percent since July 22 as more than $2.7 trillion in value was erased from U.S. equities. The Dow Jones Industrial Average slumped 172.93 points, or 1.6 percent, to 10,817.65 today, with Hewlett-Packard dragging it down by more than 44 points.
“The market is in dire need of confidence,” Burt White, who helps oversee $330 billion as chief investment officer at LPL Financial Corp. in Boston, said in a telephone interview. “It’s looking for policy makers to give confidence. The market is grasping for any possible signs of good news. Cheap isn’t cheap enough when you have a confidence problem.”
The S&P 500 has fallen 18 percent from an almost three-year high on April 29 amid concern about Europe’s debt crisis and a global economic slowdown. The decline through Aug. 8 drove the index to a valuation of 12.2 times reported earnings, the lowest level since March 2009. Its price-earnings ratio is 12.3, compared with the average of 16.4 since 1954, according to data compiled by Bloomberg.
Global Stocks Slump
Global stocks fell today, extending this week’s slump in the MSCI All-Country World Index to 3.9 percent, after some of the world’s biggest banks cut their forecasts for growth. JPMorgan Chase & Co. (JPM) said the U.S. economy may expand less than previously projected in the next two quarters as consumer sentiment drops and the housing market fails to gain momentum. Earlier this week, Morgan Stanley cut its forecast for global growth in 2011, and Citigroup Inc. lowered estimates for the U.S. in a note dated yesterday.
Futures on the S&P 500 pared losses earlier amid optimism European Union regulators may push for joint bond sales by euro- area nations to help contain the debt crisis, putting pressure on Germany to drop its opposition. The European Commission said it may present draft legislation on euro bonds when completing a report on the feasibility of common debt sales. The commission, the EU’s regulatory arm in Brussels, opposed such a step earlier this year because of Germany.
Chancellor Angela Merkel stepped up her rejection of jointly issued euro-area bonds, saying that a “collectivization” of the region’s debt would leave euro members worse off. “We don’t want that,” she told members of her Christian Democratic Union today in Hameln, Germany.
“This is a very policy-driven approach to pricing amid a lack of enthusiasm on the part of the Europeans, specifically the Germans, not willing to assume any more risk,” Peter Kenny, a managing director in institutional sales at Knight Capital Group Inc. in Jersey City, New Jersey, said in an interview today. “The reason that the market is not selling off more broadly today goes back to the sense that valuations beg for attention.”
This is the second period since the 1950s in which stocks have paid higher yields than bonds, according to Birinyi Associates Inc. The 2.29 percent dividend payout for S&P 500 companies is higher than the 2.07 percent rate on 10-year Treasury notes, according to data compiled by Bloomberg.
‘Do Valuations Matter?’
“Do valuations matter?” said Jeffrey Davis, who oversees $5 billion as chief investment officer at Lee Munder Capital Group in Boston. “They do. If you get a deeper fall, you’re probably going to have a steeper recovery. People are having a hard time valuing securities amid this confidence crisis that we have right now.”
Hewlett-Packard tumbled 20 percent to $23.60. Leo Apotheker cut sales forecasts for the third time since becoming CEO in November, citing tepid demand. He’s spinning off the personal computer unit, dropping a five-month-old plan to put the WebOS mobile software on devices and purchasing Autonomy Corp. for $10.3 billion. While aimed at helping adding higher-margin products, the shifts are costly and may be time consuming, said Brian Marshall, an analyst at Gleacher & Co.
“People just lost confidence in the company,” said Marshall, who is based in San Francisco and has a “buy” rating on the stock. “People are realizing the financial model is in greater disarray than they previously thought.”
UBS AG downgraded the shares to “neutral” from “buy,” while Deutsche Bank AG cut its recommendation to “sell” from “hold.”
The KBW Bank Index (BKX) of 24 stocks dropped 2.9 percent after slumping 5.6 percent yesterday. Citigroup retreated 4.3 percent to $26.77. JPMorgan fell 2.4 percent to $34.35.
The Morgan Stanley Cyclical Index of companies most-tied to the economy retreated 3 percent. Caterpillar Inc. slumped 4 percent to $79.97, while Ford Motor Co. tumbled 3.8 percent to $9.99. Companies least-dependent on economic activity, including health-care, consumer staples and utility providers in the S&P 500, outperformed the index today.
Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market’s biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 yesterday, using 60 days of data, according to MF Global.
The increase shows investors are ignoring the merits of individual stocks and instead reacting to news about the economy, said Craig Peskin, co-head of technical analysis at the New York-based securities firm.
High correlation “is usually the case in a bear market, when investors are liquidating equities as an asset class,” Peskin wrote in an e-mail yesterday. “In a bull market, when investors are differentiating, we see low or falling correlation.”
Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global data. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.
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