U.S. Stocks Erase Year’s Best Rally on Growth Concerns

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The Standard & Poor’s 500 Index plunged the most since April, erasing its biggest rally this year, on concern that slowing growth in Europe will hurt the American economy as the Federal Reserve ends its bond purchases.

All 10 of the main S&P 500 groups dropped at least 0.9 percent. Energy stocks plunged 3.7 percent to pace losses as U.S. crude slipped into a bear market. Materials producers sank 2.5 percent even as precious metals rallied. Alcoa Inc. lost 4.2 percent after unofficially starting the earnings season. The Chicago Board Options Exchange Volatility Index jumped 24 percent to the highest since February.

The S&P 500 dropped 2.1 percent to 1,928.21 at 4 p.m. in New York, after rallying 1.7 percent yesterday. The Russell 2000 Index sank 2.7 percent. Both gauges had their worst day since April. The Dow Jones Industrial Average lost the most since February, sinking 334.97 points, or 2 percent, to 16,659.25. That cut its gain this year to 0.5 percent.

“The fear is that global interest rates are so low that there’s risk of deflation, and the economic recovery, which has shown some steady progress, is now deteriorating,” Timothy Ghriskey, who helps oversee $1.5 billion as chief investment officer for Bedford Hills, New York-based Solaris Asset Management LLC, said in a phone interview. “The news out of Europe is nothing new, but it’s come to front and center now with Draghi’s new comments.”

Equities extended losses today after European Central Bank President Mario Draghi said there are signs the euro-area’s economic growth is slowing and policy makers must lift inflation from an “excessively low” level. Separately, a report by four economic institutes said Germany’s economy is on the verge of recession.

Volatility Return

The S&P 500 advanced 1.8 percent yesterday, the biggest jump since October 2013, following the Federal Reserve’s hint that interest rates will stay near zero amid concerns that a slowdown in global growth and stronger dollar will hurt the U.S. economy.

After plunging 1.5 percent on Oct. 7, the S&P 500’s rally yesterday was the biggest turnaround in almost three years. The measure ended 2.1 percent away from its all-time closing high of 2,011.36 reached Sept. 18. The gauge is up 4.3 percent this year.

Volatility is returning to stocks after the market experienced the longest stretch of calm in two decades. Seven trading days into October, the S&P 500 has posted five days of moves of more than 1 percent. The index went without a 1 percent move for 62 days through July 16, the longest stretch since 1995.

The VIX jumped 24 percent 18.76 today, the highest since Feb. 5.

Volume Spike

Over the last 15 days, the S&P 500 has posted an average daily change of about 0.9 percent, compared with 0.48 percent in 2014 before that. Volume has risen correspondingly, with an average of about 7 billion shares changing hands each day on U.S. markets through yesterday, compared with 6.2 billion the rest of this year. About 8.3 billion traded today on U.S. exchanges.

“We’ve seen the reintroduction of the risk-on risk-off propensity of the market and that high level of volatility is here to stay for awhile,” Drew Wilson, an investment analyst with Fenimore Asset Management in Cobleskill, New York, said by phone.

Some Fed officials said Europe’s cooling economy and low inflation could lead to a further appreciation of the dollar. That, in turn, might curb U.S. exports and limit price gains that have lagged behind the Fed’s goal. The release of minutes came a day after the International Monetary Fund cut economic-growth forecasts and warned of “frothy” equities.

Draghi Challenge

European stocks dropped a third day today, extending losses from earlier in the week spurred by the IMF lowering its forecasts and data showing German industrial production contracted the most in more than five years.

Draghi said in speech in Washington that boosting growth in the euro area will have to come through improvements in productivity.

“We are accountable to the European people for delivering price stability, which today means lifting inflation from its excessively low level,” he said. “And we will do exactly that.”

Investors are also keeping an eye on developments in Hong Kong, where the government today suspended plans to hold formal talks with pro-democracy protesters tomorrow after leaders of the movement called for more demonstrations.

Uncertainty Phase

U.S. data today showed the number of Americans filing applications for unemployment benefits unexpectedly fell last week, pushing the average over the past month to the lowest level in eight years and signaling that employers are hanging on to workers as the economy improves.

“We are in a phase of uncertainty until the big companies release their third-quarter figures,” said Christian Zogg, who manages about the equivalent of about $10 billion as head of equity and fixed income at LLB Asset Management AG in Vaduz, Liechtenstein. “The question in the U.S. is whether companies can keep their good margins.”

Profit at companies in the S&P 500 rose 4.9 percent in the July-September period, according to the average estimate of analysts in a Bloomberg survey. PepsiCo and Family Dollar Stores Inc. reports earnings today.|

Energy Rout

Energy stocks declined 3.7 percent today, led by losses of more than 6.3 percent in both Newfield Exploration Co. and QEP Resources Inc. The group has plunged 16 percent since reaching a high in June as the price of oil has tumbled.

West Texas Intermediate oil joined Brent in falling more than 20 percent from this year’s June peak, meeting a common definition of a bear market, on concern rising global supplies will be more than enough to meet slowing demand.

Materials stocks lost 2.5 percent, dropping to the lowest level since April. Newmont Mining Corp. and Dow Chemical Co. fell at least 3.5 percent to lead losses.

Among stocks moving on corporate news, Gap Inc. plunged 12 percent after saying its chief executive officer will step down. Advanced Micro Devices Inc. sank 10 percent to a 17-month low after naming a new CEO a week before reporting earnings. Alcoa fell 4.2 percent after unofficially starting the earnings season. Apple Inc. climbed 0.2 percent after investor Carl Icahn urged the company to accelerate share repurchases.

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