Dow Average Has Longest Weekly Slump Since 2004 on Jobs Report

U.S. Stocks Drop as Employment Growth Trails
Caterpillar Inc. and DuPont Co. dropped at least 1.5 percent, pacing declines in industrial companies. Photographer: Matthew Lloyd/Bloomberg

U.S. stocks extended a fifth straight weekly drop, the longest slump for the Dow Jones Industrial Average since 2004, as slower-than-estimated growth in jobs fueled concern that earnings forecasts are too optimistic.

Alcoa Inc. and DuPont Co. each retreated 1.7 percent, pacing losses among companies most-tied to economic growth. The Dow Jones Transportation Average, which is considered a proxy for the economy, declined 1.7 percent. Monster Worldwide Inc., the largest online-recruiting company, tumbled 5.7 percent after payrolls grew at the slowest pace in eight months and the U.S. jobless rate unexpectedly climbed to 9.1 percent in May.

The Standard & Poor’s 500 Index retreated 1 percent to 1,300.16 at 4 p.m. in New York, the lowest since March 23. The benchmark gauge for American equities had its longest weekly slump since July 2008, falling 4.7 percent since April 29. The Dow fell 97.29 points, or 0.8 percent, to 12,151.26 today.

“It’s a highly worrisome jobs report that should jolt policy makers into realizing the U.S. faces an employment crisis,” said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund. “The details indicate that the stimulus-driven cyclical recovery has done little to overcome what is an increasingly structural unemployment problem. The economy is in a soft patch that places pressures on equity prices.”

Weak Economic Data

The S&P 500 slumped 3.4 percent over the last three days also as a report showed weaker-than-forecast employment growth in ADP Employer Services’ and as manufacturing expanded at the slowest pace in more than a year. Still, the index is up 3.4 percent this year amid government stimulus measures and higher-than-estimated corporate earnings.

Employers added a less-than-projected 54,000 jobs last month, after a revised 232,000 gain in April that was smaller than initially estimated, Labor Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for payrolls to rise 165,000. The jobless rate climbed to the highest level this year from 9 percent a month earlier.

“The jobs report is the last nail in the coffin,” said Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., which oversees $3.65 trillion as the world’s largest asset manager. “It confirms that the economy is dramatically slowing. It tells me that the Fed will be in no rush to tighten monetary policy. This to me is a rational correction in stocks. You probably need to see some moderation in earnings estimates.”

Failed to Derail

Michael Shaoul, whose Marketfield Fund Ltd. beat 81 percent of competitors last year with investments in transportation and retail companies, said private-sector hiring has risen by an average 145,000 a month over the last year, faster than economists had predicted. He noted that smaller gains in nonfarm payrolls reported in February and July 2004 failed to derail the last bull market, which peaked in October 2007.

“What the data will do, however, is accelerate the process of economic revision, with estimates of U.S. growth being forced significantly lower across the board,” Shaoul wrote in a note to clients. “As damaging as the process may be for asset values, it has surprisingly little to do with the actual ability of corporations to generate revenue.”

UBS AG strategists led by Chief Economist Larry Hatheway reduced their stance on global equities to “underweight,” saying the worldwide economy “is clearly enduring a soft patch.”

Earnings Estimates

Data on the economy is trailing forecasts by the widest margin since the bull market began in March 2009, according to the Citigroup Economic Surprise Index for the U.S. At the same time, stock analysts have been boosting forecasts for S&P 500 profit growth. Companies in the index are forecast to earn $105.31 a share over the next 12 months, compared with $96.92 at the beginning of January, data compiled by Bloomberg show.

Based on those estimates, the S&P 500 is trading at a price-earnings ratio of 12.3, compared with an average forward multiple of 14.7 since 2006, the data show. Profit forecasts have beaten analyst estimates for nine straight quarters. The index is priced at 1.3 times reported sales, down from a 32-month high of 1.4 in February, and 2.2 times book value, according to data compiled by Bloomberg.

“The only saving grace for the stock market in that environment is that P/E multiples are not very challenging relative to history,” said Jim McDonald, chief investment strategist at Northern Trust Corp. in Chicago, which manages $662 billion. Stocks are not expensive. That’s something that helps mitigate the downside.’’

Tied to Economy

Companies most-tied to economic growth slumped. The Morgan Stanley Cyclical Index fell 1.6 percent as 28 of its 30 stocks retreated. Alcoa dropped 1.7 percent to $15.92. DuPont declined 1.7 percent to $50.29. FedEx Corp. slumped 1.5 percent to $90.15.

Monster Worldwide, the largest online-recruiting company, tumbled 5.7 percent to $13.58, the lowest level since October. The stock also had the third-biggest decline in the S&P 500.

Newell Rubbermaid Inc. tumbled 12 percent to $14.97. The maker of Rubbermaid containers cut its profit forecast amid slower consumer spending. More than two-third of Newell’s sales come from the U.S., where persistent joblessness and surging prices for food and gas have forced shoppers to watch their wallets.

The benchmark index for U.S. stock options and the S&P 500 fell, breaking their pattern of moving in opposite directions, as lower-than-estimated job growth failed to spur traders to pay more for insurance against equity losses. The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 0.8 percent to 17.95. The index measures the cost of using options as protection against declines in the S&P 500.