U.S. Stocks Drop as Fed Cuts Growth Forecast, Plans for QE2 End

U.S. Stocks Erase Losses as Commodity, Industrial Companies
Traders work on the floor of the New York Stock Exchange in New York. Photographer: Ramin Talaie/Bloomberg

U.S. stocks declined, halting a four-day rally, after the Federal Reserve lowered its forecast for economic growth and said it plans to finish its $600 billion bond-purchase program this month as scheduled.

Adobe Systems Inc., the world’s largest maker of graphic-design software, retreated 6.3 percent after reporting lower-than-expected Europe sales. Sprint Nextel Corp. decreased 2.3 percent as Sanford C. Bernstein & Co. said the company faces risks from its strategy for fourth-generation phones. FedEx Corp., operator of the world’s biggest cargo airline and considered a proxy for the economy, advanced 2.6 percent after forecasting earnings that may top analysts’ projections.

The Standard & Poor’s 500 Index lost 0.7 percent to 1,287.14 at 4 p.m. in New York, after rallying 2.4 percent over the previous four days. The Dow Jones Industrial Average dropped 80.34 points, or 0.7 percent, to 12,109.67 today.

“The Fed is pretty conscious of the fact that the economy has softened,” said Liam Dalton, president of Axiom Capital Management Inc. in New York, which oversees $1.4 billion. “Even though the economy may stabilize, it’s a less exciting picture right now. Stock players are going to be a little more reluctant to take risks.”

The S&P 500 has retreated 5.6 percent from this year’s high at the end of April amid weaker-than-estimated economic data and concern about Europe’s debt crisis. The benchmark gauge for American equities was still up 2.4 percent in 2011 on government stimulus measures and better-than-expected earnings.

Fed Cuts Forecasts

Fed officials lowered their forecasts for growth and employment this year and next, projecting the economy will expand 2.7 percent to 2.9 percent this year, down from forecasts ranging from 3.1 percent to 3.3 percent in April. U.S. central bankers said inflation, excluding food and energy, will be somewhat higher than previously forecast. They said the pace of recovery is likely to “pick up over coming quarters.”

“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected,” the Federal Open Market Committee said today in a statement. “The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings.”

The S&P 500 surged 23 percent since Fed Chairman Ben S. Bernanke’s Aug. 27 speech in Jackson Hole, Wyoming, where he foreshadowed the second round of bond purchases, known as quantitative easing or QE, to boost the economy.

Third Round

In a Twitter post this morning, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said the Fed at its Jackson Hole meeting this August “will likely hint” at a third round of quantitative easing and an effort to limit borrowing costs through interest-rate caps.

“The economy would have to decelerate materially from here for the Fed to do another round of quantitative easing,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion. “The economy will continue in a low trajectory of recovery. The underlying fundamentals remain in place.”

Adobe fell 6.3 percent to $30.01. The San Jose, California-based company dealt with uneven overseas sales in the second quarter while readying a new version of its flagship Creative Suite software. Europe was weaker than anticipated primarily because customers in Scandinavia and the U.K. held back purchases, Chief Financial Officer Mark Garrett said on a conference call yesterday.

Adobe’s Profit Forecast

Adobe also said profit for the third quarter may be as low as 50 cents a share, compared with the 54-cent average analyst projection, excluding certain items.

Sprint Nextel declined 2.3 percent to $5.12. Investors are optimistic about a turnaround, according to Craig Moffett, an analyst at Sanford C. Bernstein. “We remain concerned that the stock does not fully discount the financing risks associated with building a 4G network, and that subscriber forecasts remain overly optimistic given deterioration in overall post-paid market trends,” he wrote in a report today.

FedEx climbed 2.6 percent to $91.44. The company is benefiting from a pickup in worldwide shipping and higher pricing. The express unit’s overall revenue per package, or yield, added 10 percent to $22.69 in the quarter through May, FedEx said.

“The FedEx data today is as good as anything,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, which manages $1.5 billion. “Boxes are still moving and that’s a sign that business is getting done.”

More Vehicles

CarMax Inc. gained 7 percent, the most in the S&P 500, to $32.66. The largest U.S. seller of used cars sold more vehicles at higher prices in its first fiscal quarter.

U.S. corporate profit margins are so high that a return to normal will cut about 3 percentage points a year from any future stock-market gains, according to Pierre Lapointe, a strategist at Brockhouse & Cooper Inc.

Margins in the first quarter were 11.3 percent overall and 13 percent in the non-financial category, based on Commerce Department data. These were the highest readings since 2007, before the latest recession started. Both were about two points higher than the average since the 1970s.

“We see no way around margin contraction,” Lapointe and economist Alex Bellefleur wrote yesterday in a report with a similar chart. U.S. companies are vulnerable even though they are increasingly generating profits overseas, they wrote.

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