U.S. Stocks Tumble to 2011 Low as Debt Concern Offsets Economy

U.S. Stock Futures Fall
Traders work on the floor of the New York Stock Exchange in New York. Photographer: Andrew Harrer/Bloomberg

U.S. stocks tumbled, sending the Standard & Poor’s 500 Index to a one-year low, as concern over Greece’s debt crisis and Bank of America Corp.’s slump outweighed a rebound in manufacturing and construction spending.

Financial shares had the biggest drop in the S&P 500 as Bank of America fell 9.6 percent to the lowest level since March 2009. Alcoa Inc. lost 7 percent amid concern about slower demand for commodities. American Airlines parent AMR Corp. slid 33 percent on concern the U.S. is nearing a return to recession and that the carrier may be forced to seek bankruptcy protection.

The S&P 500 lost 2.9 percent to 1,099.23 at 4 p.m. New York time, its lowest close since Sept. 8, 2010. The Dow Jones Industrial Average declined 258.08 points, or 2.4 percent, to 10,655.30, also the lowest level in more than a year.

“The focus will be on Europe until they get their house in order,” Tom Wirth, who helps manage $1.5 billion as senior investment officer for Chemung Canal Trust Co., in Elmira, New York, said in a telephone interview. “There’s a tremendous amount of pessimism built into stocks as the market prices in a recession. In the U.S., we had a good ISM number which shows the economy is growing slowly, but not going into a recession.”

The S&P 500 came within 1 percent of extending its decline from this year’s high to 20 percent, the common definition of a bear market. Losses accelerated in the S&P 500 after the gauge fell below a series of prices considered significant by analysts who base investment decisions on charts. The index slipped below 1,119.46, its previous lowest close of the year, just before 12:50 p.m. and breached 1,114.22, the worst intraday level of September, about 15 minutes later.

‘Accelerated Selling’

“There’s reason to think that the bears will take control,” Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research in Cincinnati said in a telephone interview. “We violated that low for the year. It could definitely lead to some accelerated selling here.”

Global stocks slumped as European officials prepared to meet in Luxembourg today to consider how to shield banks from the debt crisis and boost the region’s rescue fund after Greece missed a deficit target for 2012. Euro region finance chiefs will meet again on Oct. 13 to decide whether the austerity push is enough to win a sixth bailout payment.

European governments are close to resolving Finland’s demand for collateral to underpin bailout loans, removing an obstacle to Greece’s second rescue package, three people familiar with the discussion said.

Economic Reports

Earlier today, stocks rose as a report showed that manufacturing in the U.S. unexpectedly accelerated in September as production picked up, easing concern the world’s largest economy is stalling. Separately, the Commerce Department said construction spending in the U.S. rebounded in August, propelled by the biggest jump in state and local government outlays in more than two years.

U.S. stocks fell last week as the sovereign debt crisis in Europe and fears of a global slowdown overshadowed improving economic reports in the U.S. The S&P 500 tumbled 14 percent in the third quarter, the worst drop since the three months ending December 2008. The index declined in nine out 13 weeks during the quarter. For the year, the S&P 500 is down 13 percent.

Bill Gross, the manager of the world’s biggest bond fund, said the global economy risks lapsing into recession with the pace of growth falling below the “new normal” level the firm has predicted since 2009.

‘Overweight Diabetic’

“Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack,” Gross wrote in a monthly investment outlook posted on Newport Beach, California-based Pacific Investment Management Co.’s website today. “If global policy makers could focus on structural as opposed to cyclical financial solutions, new normal growth as opposed to recession might be possible.”

Financial shares in the S&P 500 fell 4.5 percent as a group. Bank of America declined 9.6 percent to $5.53. Financial shares are under pressure as European regulators struggle to quell concern that their lenders may be hurt by the sovereign debt crisis.

Citigroup Inc. slumped 9.8 percent to $23.11. The bank may be penalized by regulators in Japan for the third time since 2004 after its Japanese retail banking unit possibly breached rules by failing to fully explain product risk to customers, two people familiar with the situation said.

The Morgan Stanley Cyclical Index of companies most-tied to the economy declined 3.6 percent. The index has dropped 7 percent over the past two sessions. The Dow Jones Transportation Average, also a proxy for the economy, slipped 3.6 percent.

AMR, Alcoa

AMR tumbled 33 percent to $1.98, the most since 2003. A Chapter 11 filing “is certainly not our goal or our preference,” said Andy Backover, an American spokesman. “We know we need to improve our results, and we have a sense of urgency as we work to achieve that.”

The S&P GSCI Index of commodities lost 0.9 percent on investors’ concern about slower demand for energy and raw materials. Alcoa, the largest U.S. aluminum producer, dropped 7 percent to $8.90.

Arch Coal Inc. slipped 9.3 percent to $13.22. The St. Louis-based coal miner cut its forecast for 2011 adjusted earnings to no more than $1.40 a share, from a previous prediction of at least $1.75. Analysts had estimated adjusted profit $2.01 a share, on average.

Yahoo, Alibaba

Yahoo! Inc. rallied 2.7 percent to $13.53, after Alibaba Group Holding Ltd. Chairman Jack Ma said he was “very interested” in buying the Web portal. “Alibaba Group is so important to Yahoo, and Yahoo is also very important to us,” Ma said, when asked if he would buy the company. The executive, whose company is 40 percent owned by Yahoo, spoke at an event at Stanford University near Palo Alto, California, on Sept. 30.

The rout that erased $2.9 trillion from U.S. equities has pushed valuations in the S&P 500 25 percent below the average level from the last nine recessions, even as profit estimates fall.

Companies in the benchmark gauge for American equities started today’s session trading at 10.2 times 2012 forecast earnings, compared with the average in economic contractions since 1957 of 13.7, according to data compiled by Bloomberg. At the same time, analysts have cut projections for profits next year by 2.6 percent to $110.78 a share, the biggest eight-week drop since 2009, the data show.

Bears say analysts have just started paring earnings estimates and that shares will prove expensive when gross domestic product shrinks. Bulls say stock prices have fallen so much that even should earnings fail to increase in 2012, equities are inexpensive.

“What you’re seeing is a growth scare,” Wayne Lin, a money manager at Baltimore-based Legg Mason Inc., said in a telephone interview on Sept. 29. His firm oversaw $643 billion as of Aug. 31. “The question is, how much of that is priced in. I’d say that if we don’t have a double-dip recession, if earnings just stay flat, these valuations are reasonable. The market already expects those downgrades.”

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