U.S. stocks fell for a third straight week, including the biggest one-day drop since 2008, as Standard & Poor’s reduction of the nation’s credit rating and Europe’s debt crisis fueled concern the economy will falter.
The S&P 500 pared its slump in the last two days of the week as government data showed jobless claims unexpectedly decreased and retail sales improved. Bank of America Corp. plunged 12 percent, the worst performing stock in the Dow Jones Industrial Average. Walt Disney Co. sank 5.9 percent after posting disappointing third-quarter studio revenue. For-profit educator DeVry Inc. lost 23 percent, the largest drop in the S&P 500, after it said new undergraduate enrollment fell.
The S&P 500 lost 1.7 percent to 1,178.81 in the five days ended Aug. 12, capping a week of record swings. The Dow fell 175.59 points, or 1.5 percent, to 11,269.02. Both gauges have fallen for three straight weeks.
“Investors are going to have to get accustomed to above-normal volatility,” Leo Grohowski, chief investment officer for BNY Mellon Wealth Management in Boston, said in a telephone interview. The firm oversees $171 billion. “Economic uncertainty is going to continue to outweigh the good news from company fundamentals. We’re all hostage to the news flow out.”
About $6.8 trillion was wiped off the value of global equity markets from July 26 through Aug. 11 as Europe’s debt crisis deepened and investors speculated the economy may contract. The swings in U.S. equities this week were unprecedented in the history of the American stock market, according to data compiled by Birinyi Associates Inc., Bloomberg and Howard Silverblatt, senior index analyst at S&P.
The S&P 500 plunged 6.7 percent on Aug. 8, its biggest slump since December 2008, in the first trading session after the U.S. was stripped of its AAA credit rating at S&P. The index rebounded 4.7 percent the next day after the Federal Reserve said it will leave its benchmark interest rate at a record low through at least the middle of 2013. The gauge then fell 4.4 percent on Aug. 10 and rebounded 4.6 percent the next day.
Never before has the S&P 500 reversed moves that large in each session over a four-day period, the data show. This week’s trading also marked the first time the Dow moved more than 400 points either up or down for four days in a row.
“This week was unnerving,” said Channing Smith, a money manager at Capital Advisors in Tulsa, Oklahoma. The firm manages $920 million. “The large price swings are indicative of uncertainty in the markets, but we haven’t panicked. Our clients haven’t panicked. We used the market sell-off to go in and buy high-quality stocks. The economy is very sluggish and growth is below-trend but it’s still positive.”
The S&P 500 rallied 5.2 percent in the final two days of the week, its biggest back-to-back gain since March 2009, as economic reports showed first-time applications for jobless benefits decreased 7,000 in the week ended Aug. 6 and retail sales increased the most in fourth months.
The Chicago Board Options Exchange Volatility Index, which is known as the VIX and measures the cost of using options as insurance against declines in the S&P 500, climbed 14 percent to 36.36 this week. The index surged 50 percent on Aug. 8, its biggest one-day gain since February 2007.
The rout in global markets spurred some Wall Street strategists and investors to revise their outlooks on equities and the economic recovery. Goldman Sachs Group Inc. cut its 2011 target for the S&P 500 on Aug. 5, while Laszlo Birinyi, one of the first investors to recommend buying when the bull market began in 2009, said his forecast for the benchmark equity index was “shaky.”
‘Uncertainty and Fear’
David Kostin, the New York-based equity strategist at Goldman, lowered his estimate for the S&P 500 to 1,400 at year end from 1,450. “Uncertainty and fear trump fundamentals and valuations,” Kostin wrote in a note. He said a recession is not “the most probable outcome in 2012.”
Birinyi, of Westport, Connecticut-based research firm Birinyi Associates Inc., wrote in an Aug. 9 note, “The bull market is intact, and while our ‘target’ of 1,450 in mid-2012 is admittedly a bit shaky, our more important conclusion that a rational, disciplined portfolio can attain a 10 percent plus return in 2011 is not.”
Birinyi also said financial companies are unlikely to outperform as the rally continues. Bank shares declined the most out of 24 groups in the S&P 500 this week, losing 1.6 percent, amid concern the European sovereign-debt crisis will threaten profits.
Bank of America sank 12 percent to $7.19. American International Group Inc. disclosed plans this week to sue the Charlotte, North Carolina-based bank over allegedly faulty mortgages. The firm’s plunge in share prices over the past week stoked concern it may need to raise capital. Chief Executive Officer Brian T. Moynihan said on a conference call hosted by mutual fund manager Bruce Berkowitz that the biggest U.S. lender is being buoyed by conditions that are better than they’ve been since the credit crisis.
Citigroup Inc. retreated 11 percent to $29.85. JPMorgan Chase & Co. slumped 4.5 percent to $35.91. American Express Co. lost 4.9 percent to $44.89. Comerica Inc. decreased 16 percent to $24.41, the second-biggest decline in the S&P 500 this week.
Disney, the world’s largest theme-park company, slid 5.9 percent to $33.09 amid concern that slowing consumer spending and rising costs at the ESPN sports network may crimp profit growth. The Burbank, California-based company posted third-quarter studio revenue of $1.62 billion, compared with the average analyst estimate of $1.83 billion.
DeVry Inc. fell 23 percent to $44.49. New summer enrollment dropped 26 percent to 15,566 from 20,935 a year earlier, the Downers Grove, Illinois-based company said.
AOL Inc. tumbled 27 percent, the most since it was spun off from Time Warner Inc. in November 2009, to $11.78. The Internet company reported on Aug. 9 a second-quarter loss and an 8.4 percent drop in sales. The New York-based company trimmed its weekly loss two days later, rising 12 percent, after announcing it authorized a $250 million stock buyback.
Speculation the economic slowdown will worsen has overshadowed better-than-estimated profit by companies. Per-share earnings increased 17 percent among the S&P 500 companies that have released quarterly results since July 11, according to data compiled by Bloomberg. About three-quarters of the companies have topped the average analyst profit forecast, the data show.
Cisco Systems Inc. rallied 7 percent to $15.99, the biggest jump in the Dow. The world’s biggest maker of networking equipment reported profit was 40 cents a share in the fiscal fourth quarter, beating the 38-cent average estimate by analysts, according to Bloomberg data.
“This is an exceptional buying opportunity for U.S. equities,” Barry Knapp, the New York-based head of U.S. equity strategy at Barclays Plc, said on a conference call this week. “The incoming data is going to be better, which is going to serve to stabilize the macroeconomic outlook and set the stage for a reversal in equity markets.”