U.S. Stocks Drop for Second Day as Bond Rout Spreads to Equities

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U.S. stocks fell for a second day, joining a retreat in global shares after a rout in fixed-income markets spread to equities.

DuPont Co. and Dow Chemical Co. fell as raw-materials dropped. Semiconductors led a decline in technology shares as Intel Corp. lost 1.4 percent. Verizon Communications Inc. slipped after agreeing to buy AOL Inc. in a deal valued at $4.4 billion. AOL jumped 18 percent. Transocean Ltd. and Noble Corp. gained more than 2.6 percent to pace an advance in energy amid oil’s rebound.

The Standard & Poor’s 500 Index fell 0.3 percent to 2,099.12 at 4 p.m. in New York. The gauge all but erased a 0.9 percent slide as the 10-year Treasury note yield retreated from the highest level since November. The Dow Jones Industrial Average slipped 36.94 points, or 0.2 percent, to 18,068.23. The Nasdaq Composite Index lost 0.4 percent.

“When you have stocks at the high end of the historical range you need better news than what we have,” said Matt Maley, an equity strategist at Miller Tabak & Co. in Newton, Massachusetts. “This rise in rates isn’t coming from a better economy or a fundamental reason.”

A global fixed-income rout is spreading to other markets as the European Central Bank’s quantitative easing helps push global debt valuations to extreme levels while traders grow more confident that the Federal Reserve will delay raising interest rates until later this year to allow for the economic recovery to gain momentum.

Whipsawed Stocks

Although the timing is uncertain, the Fed’s first rate increase since 2006 will usher in a “regime shift” that will stir financial markets when it occurs, said New York Fed President William C. Dudley on Tuesday.

San Francisco Fed President John Williams, who votes on policy this year, said the Fed could decide to begin raising interest rates at any policy meeting, and that he is in “wait and see mode” headed into the next gathering in June.

Concern the Fed would raise borrowing costs even with economic data missing projections, along with estimates for a slump in corporate profits, have whipsawed stocks between gains and losses in the past five weeks. Equities posted their biggest rally since March on Friday, after a report showed hiring bounced back in April from a winter slowdown.

Data for April are due later this week on retail sales and industrial production. A Friday report may show consumer sentiment remained near its highest level since 2007 this month.

Earnings Growth

“Equities have actually managed to hold on despite a series of disappointing macro data and rising bond yields,” SEB AB’s Thomas Thygesen head of cross-asset strategy, said by phone from Copenhagen. “We’re all betting that U.S. growth will pick up again, and the risk is that it doesn’t. Stocks will feel more comfortable about higher bonds yields if we get a confirmation that the winter weakness was just temporary.”

Companies are beating earnings estimates and analysts have reversed their predictions for a decline. S&P 500 members are now on track to deliver income growth of 0.2 percent in the first quarter, compared with projections for a 5.8 percent decline as recently as March. Analysts still predict declines in the following two quarters.

The Chicago Board Options Exchange Volatility Index fell 0.7 percent to 13.86, after earlier rising 9.2 percent. The gauge, known as the VIX, ended Friday with its second straight weekly gain for the first time since March 13. About 6 billion shares traded hands, 8 percent below the three-month average.

Materials Slide

Eight of the S&P 500’s 10 main groups fell, with raw-materials, technology and health-care companies down the most. Declines in semiconductors led tech shares lower. Intel, Micron Technology Inc. and Lam Research Corp. lost more than 1.3 percent.

FMC Corp. and International Flavors & Fragrances Inc. dropped more than 4.1 percent as the raw-materials group slumped 1 percent. FMC posted its steepest fall in more than 10 months. Martin Marietta Materials Inc. sank 2 percent.

Eli Lilly & Co. and Actavis Plc slipped at least 1.4 percent as health-care shares fell. Tenet Healthcare Corp. lost 2 percent after rising 1.5 percent Monday. Morgan Stanley and Genworth Financial Inc. dropped more than 1.3 percent to pace a retreat among financial companies in the benchmark index.

Transportation shares slumped as oil prices rose. A Bloomberg gauge of U.S. airlines decreased 1.5 percent after four days of gains. Southwest Airlines Co. and United Continental Holdings Inc. lost more than 1.7 percent.

Gap Inc. slid 3.8 percent, the most since November after the biggest U.S. apparel-focused retailer posted same-store sales for April that trailed analysts’ estimates. Comparable sales for the Gap chain plunged 15 percent last month, compared with a projected 11 percent decline.

Energy Rebounds

Rackspace Hosting Inc. fell 14 percent, the most in eight months, after releasing a sales outlook that was below analysts’ estimates.

Energy companies rallied as crude climbed 2.5 percent. Chesapeake Energy, Noble Corp. and Transocean added at least 1.7 percent, rebounding after the energy group Monday dropped the most since January.

Pall Corp. surged 19 percent for its biggest gain ever. The Wall Street Journal on Monday reported the maker of water-filtration and purification systems was close to being bought for more than $10 billion.

Edwards Lifesciences Corp. rose 2.7 percent, the most in almost two months, as JPMorgan Chase & Co. analyst Michael Weinstein upgraded the stock to overweight from neutral with a target price of $155.

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