U.S. stocks fell for the week, giving the Standard & Poor’s 500 Index its first decline since August, amid concern that budget fights in Washington could lead to a government shutdown and slow the economic recovery.
Morgan Stanley and Goldman Sachs Group Inc. dropped at least 3.9 percent for the week, pacing losses among financial shares. J.C. Penney Co. dropped 30 percent after lowering its year-end liquidity forecast. Lennar Corp. and KB Home each climbed 2 percent as earnings topped analyst estimates and data showed new-home sales increased in August. Nike Inc. (NKE) gained 6.2 percent as earnings were boosted by North American sales.
The S&P 500 declined 1.1 percent to 1,691.75 for its first weekly drop since Aug. 30. The benchmark gauge is poised for a quarterly gain of 5.3 percent, its third straight three-month advance. The Dow Jones Industrial Average lost 192.85 points, or 1.3 percent, to 15,258.24.
“All eyes are on Washington right now,” said Jim Russell, chief equity strategist for U.S. Bank Wealth Management in Cincinnati. He helps oversee $112 billion. “This will increasingly be a negative headwind for consumer confidence, business confidence, and therefore will probably slow the economy to some degree should a lack of agreement persist.”
The U.S. Senate voted to finance the government through Nov. 15 after removing language to choke off funding for the health-care law, putting pressure on the House to avoid a federal shutdown set to start Oct. 1. The vote sets up a weekend of negotiating and brinkmanship that could continue until spending authority expires on Sept. 30.
“I don’t think either the bond or the stock market has fully priced in an actual government shutdown,” Sam Wardwell, an investment strategist at Pioneer Investments in Boston, said in a phone interview. His firm manages about $217 billion.
A shutdown of the U.S. government would reduce fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, according to economists at Moody’s Analytics Inc.
The economy expanded at a faster pace in the second quarter from the previous three months, data during the week showed, with gross domestic product rising at a 2.5 percent annualized rate. Other reports showed Americans unexpectedly filed fewer claims for unemployment benefits, while an index of consumer confidence dwindled to a five-month low in September as Americans’ views on the economy dimmed.
Investors have been watching economic reports to help determine whether growth is sufficient for the Federal Reserve to begin cutting bond purchases at its next meeting in October. The Federal Open Market Committee said on Sept. 18 it would not yet begin scaling back its $85 billion monthly bond buying program, pushing equity indexes to a record high. Fed Chairman Ben S. Bernanke said it will begin tapering when economic data shows a stronger U.S. recovery.
The week featured comments from several Fed regional bank presidents. Fed Bank of New York President William C. Dudley said budget battles in Washington are among the risks to the outlook and he wants to see more momentum in the economy before paring the pace of the central bank’s bond buying.
His Atlanta counterpart Dennis Lockhart said monetary policy should focus on creating a more dynamic economy, while Fed Bank of Dallas President Richard Fisher said the central bank harmed its credibility with the decision last week.
The Fed will take the first step in reducing its monthly bond purchases in December, according to 59 percent of 41 economists in a Sept. 18-19 survey.
“The FOMC’s decision to postpone tapering on the back of weaker-than-forecast economic data creates a challenging investing environment,” Trevor Mottl, Susquehanna Financial Group LLLP’s New York-based head of derivatives strategy, wrote in a Sept. 23 note to clients. “On one hand equities should benefit from the additional stimulus, but the prospect of tapering at the October or December meeting may result in a choppy, range-bound equity market.”
The concerns about the budget impasse and central bank stimulus come as the end of the third quarter approaches. Investors should expect $23.5 billion in selling of equities and buying of bonds as pension fund managers rebalance their portfolios, Ramon Verastegui, head of engineering and strategy at Societe Generale SA in New York, wrote in a Sept. 25 note.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 (SPX) options prices known as the VIX, jumped 18 percent to 15.46 for the biggest weekly advance in a month. The measure has declined 14 percent this year.
Consumer-staples providers dropped 2.1 percent as all 10 main groups in the S&P 500 declined. Financial shares lost 1.9 percent.
Goldman Sachs fell 5.8 percent to $159.85 for the biggest drop in the Dow. The bank joined the 30-stock gauge at the close of trading Sept. 20. Morgan Stanley sank 3.9 percent to $27.08 and Citigroup Inc. lost 4.5 percent to $48.89.
The biggest U.S. banks’ fixed-income trading revenue will probably fall 20 percent in the third quarter from a year ago on lower volumes, according to Richard Staite, an analyst at Atlantic Equities LLP. Goldman and Morgan had their earnings estimates lowered by Brad Hintz, a Sanford C. Bernstein & Co. analyst, amid a decline in trading he called “a full-scale rout.”
J.C. Penney plummeted 30 percent to $9.05, its largest weekly decline ever, after a Goldman Sachs analyst raised concerns about the chain’s liquidity. The department-store chain began a share offering to raise as much as $932 million and lowered its year-end liquidity forecast. J.C. Penney, which hasn’t turned a quarterly profit since mid-2011, is down 54 percent (JCP) for the year.
BlackBerry Ltd. fell 8 percent to $8.03 as it reached a preliminary buyout agreement that could take the company private in a $4.7 billion deal. The Waterloo, Ontario-based smartphone maker also released a more complete financial report following a preliminary statement in the previous week showing a wider loss and an unexpectedly sharp revenue decline.
Fairfax Financial Holdings Ltd., BlackBerry’s largest investor, said on Sept. 23 it had signed a tentative offer to purchase the company with help from other partners.
Wal-Mart Stores Inc. lost 1.9 percent to $74.36. The world’s biggest retailer plummeted 1.5 percent on Sept. 25, weighing on the overall market, after telling suppliers it’s cutting orders placed with suppliers this quarter and next to address rising inventory.
Consumer discretionary stocks showed the best performance for the week, with a 0.2 percent decline.
Nike surged 6.2 percent to a record $73.64 for the biggest advance in the Dow. (INDU) The world’s largest sporting-goods company posted fiscal first-quarter profit that topped analysts’ estimates after demand for running and basketball shoes helped North American sales. Nike started trading in the Dow average during the week as part of the biggest reshuffling of the gauge since April 2004.
Lennar jumped 2 percent to $35.86, and KB Home rose 2 percent to $17.98. Both homebuilders posted quarterly earnings that beat estimates as they sold more homes and raised prices.
Economic reports during the week showed housing prices in 20 cities rose in the 12 months through July by the most in more than seven years, while purchases of new homes increased in August.
Applied Materials Inc. soared 10 percent, the biggest weekly gain since 2009, to $17.60 as the largest chipmaking-equipment supplier said it would acquire Tokyo Electron Ltd. for $9.39 billion in stock.
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