S&P 500 Falls After Rising to the Highest Since June 2008

The Standard & Poor’s 500 Index fell, snapping a five-day advance, after the benchmark gauge for U.S. equities rallied to the highest level since June 2008.

A gauge of financial shares in the S&P 500 swung between gains and losses following the Federal Reserve’s stress test results. Citigroup Inc. and MetLife Inc. lost more than 3.3 percent. Bank of America Corp. and Zions Bancorporation rose at least 4.1 percent. The Dow Jones Transportation Average fell 1.4 percent as the Fed’s better economic assessment caused investors to reduce bets on more monetary easing. Apple Inc. added 3.8 percent as Morgan Stanley raised its share-price estimate.

The S&P 500 fell 0.1 percent to 1,394.28 at 4 p.m. New York time, after closing yesterday at 14.4 times reported earnings, the highest valuation level since July. The Dow Jones Industrial Average advanced 16.42 points, or 0.1 percent, to 13,194.10. The Russell 2000 Index of small companies dropped 0.9 percent to 823.40. About 7.5 billion shares changed hands on U.S. exchanges, or 13 percent above the three-month average.

“It’s an issue of confidence,” Robert Zagunis, co-portfolio manager at Jensen Investment Management Inc., said in a telephone interview from Portland, Oregon. His firm oversees $5.7 billion. “Little by little, things are improving. You have symbolic announcements like the Fed stress tests. Longer-term, the market will be higher, but there may be a scale back. The question is -- are you in for the short term or the long term?”

Concern that stock gains have outpaced economic prospects grew as the S&P 500 capped the best start to a year since 1991, approaching the median 2012 projection of strategists surveyed by Bloomberg of 1,400. The benchmark measure rose amid better-than-estimated economic data and corporate earnings.

Bank Stocks

A measure of financial shares in the S&P 500 added less than 0.1 percent, after rising as much as 0.4 percent and falling 1 percent earlier today. After the close of trading yesterday, the Fed said 15 of 19 banks would be able to maintain capital levels above a regulatory minimum in an “extremely adverse” economic scenario, even while continuing to pay dividends and repurchasing stock.

Citigroup slumped 3.4 percent to $35.21. MetLife fell 5.8 percent to $37.16. Bank of America added 4.1 percent to $8.84. Zions Bancorporation soared 11 percent, the most in the S&P 500, to $21.58. Regions Financial Corp. jumped 6.9 percent to $6.17.

“You have the Fed putting an approval rating on a lot of these banks saying: we’re comfortable with their financial position,” Andrew Slimmon, managing director of global investment solutions at Morgan Stanley Smith Barney, said in a phone interview from Chicago. His firm had $1.6 trillion in client assets at the end of 2011. “Then, you look at their valuation and boy, these stocks are very cheap.”

Improving Profits

The KBW Bank Index rose 1.3 percent, extending this year’s gain to 22 percent, on expectations of stronger economic growth and improving profits. Concern that the nation’s banks may be damaged by Europe’s debt crisis helped drive down the index 25 percent in 2011, its worst annual performance since 2008.

U.S. bank shares will rally further, building on yesterday’s gains, even as the S&P 500 looks set to retreat, according to a technical analyst at UBS AG.

“It’s not like we’re getting super bullish, but the breakout in financials is game-changing,” Michael Riesner said in a telephone interview from Zurich.

Transportation stocks dropped the most in the S&P 500 among 24 industries, falling 1.5 percent. The group is considered a proxy for economic growth. The Fed said yesterday that strains in global financial markets have eased and the labor market is gathering strength, adding to speculation that it will refrain from additional stimulus. CSX Corp. slid 2.9 percent to $20.21. Union Pacific Corp. fell 2.4 percent to $107.71.

Another Round

Pacific Investment Management Co.’s Mohamed El-Erian said the Fed’s stress tests on financial institutions were a good sign for an economy that may still receive another round of asset purchases from the bank.

“They were credible, and unambiguously this is good news,” El-Erian, the chief executive officer of the world’s largest manager of bond funds, said of the bank tests during an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “The big hope for everybody is that they’ll start lending into the real economy.”

Gold producers tumbled on speculation that an economic recovery will curb demand for the metal. Gold has surged since December 2008 as the Fed held U.S. borrowing costs at a record low and bought $2.3 trillion in housing and government debt during two rounds of so-called quantitative easing.

Newmont, Freeport

Newmont Mining Corp., the largest U.S. gold producer, dropped 1 percent to $54.30. Freeport-McMoRan Copper & Gold Inc. retreated 2.5 percent to $38.12.

Technology shares had the biggest gain among 10 groups. Apple climbed 3.8 percent to a record $589.58, rising for a sixth day. The world’s largest technology company had its share price estimate raised to $720 from $515 at Morgan Stanley.

Cliffs Natural Resources Inc. rose 7.1 percent to $69.50. The largest U.S. iron-ore producer more than doubled its dividend and said it’s refocusing on the execution of expansion projects.

The Chicago Board Options Exchange Volatility Index, called the “fear gauge” because it typically moves in a direction opposite to stock prices, may stay near the five-year low it hit yesterday, according to blogger Bill Luby.

“I can sense that quite a few are ready to grab the nearest pitchfork and riot about the inhumanity of the wayward VIX,” Luby wrote in his blog yesterday, referring to those who expect the VIX to increase. “Of course, not all bull markets are the same and every wall of worry is made of different types of stones, but at some point, investors need to come to terms with the reality of a VIX of 15.”

The VIX yesterday fell as much as 11 percent to 13.99, the lowest intraday level since June 2007, and closed at 14.80. The VIX today rose 3.5 percent to 15.31, snapping a five-day retreat.

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