U.S. Stocks Fall Amid Rate Concerns as Commodity Shares Tumble

Mario Draghi Dovish on European Economy
  • Traders assess comments from Fed speakers on outlook
  • S&P 500 falls further after approaching record last week

U.S. stocks fell the most in six weeks as a rout in commodities pressured energy and raw-materials providers while investors braced for the first rise in interest rates since 2006.

Chevron Corp. dropped 2.5 percent and miner Freeport-McMoRan Inc. sank 5.8 percent as the stronger dollar and a persistent slump in demand from China sent the Bloomberg Commodity Index to the lowest since 1999. The recent weakness in commodity shares is a turnabout after energy and raw-materials helped drive a rebound from a summer correction and in October had their strongest month in four years.

The Standard & Poor’s 500 Index fell 1.4 percent to 2,045.97 at 4 p.m. in New York, slipping below its average price during the past 200 days for the first time in two weeks. The U.S. equity benchmark has struggled to hold gains after rallying to within 1 percent of a record on Nov. 3. The Dow Jones Industrial Average lost 254.15 points, or 1.4 percent, to 17,448.07. The Nasdaq Composite Index declined 1.2 percent. About 7.1 billion shares traded hands on U.S. exchanges, about 4 percent below the three-month average.

“Tighter policy expectations coming out of the Fed has led to a mini rally in the dollar and inflation expectations seem fairly well-anchored so additional pressure on commodities is not really a surprise,” David Lafferty, the chief market strategist for Natixis Global Asset Management in Boston, said by phone. “The fact it’s all commodities seeing weakness tells you it’s a dollar and Fed-related story.”

Fed Speakers

Federal Reserve officials today stressed that policy should be tightened only gradually after interest rates are increased for the first time in almost a decade, with New York Fed President William C. Dudley saying the conditions for liftoff “could soon be satisfied.”

In addition to Dudley’s comments, Fed Bank of St. Louis President James Bullard said the U.S. central bank should raise interest rates from near zero because emergency policies are not needed with the labor market and inflation near to the central bank’s goals.

Fed Bank of Chicago President Charles Evans said regardless of when it begins raising rates, the Fed must be clear that the pace of future increases will be gradual. Traders are now pricing in a 64 percent chance of a rate rise next month, up from odds of 27 percent less than a month ago.

The S&P 500 has advanced just once in the seven sessions since Fed Chair Janet Yellen reminded investors that December’s meeting could bring the first rate increase in six years. Investors raised the probabilities of a Fed rate hike in December after a Labor Department report Friday showed 271,000 jobs were added in October, and the jobless rate fell to 5 percent.

Employment Data

Data today showed applications for unemployment benefits were unchanged in the first week of November, signaling employers with a healthier appetite for hiring are also holding the line on firings. A separate report showed the number of positions waiting to be filled in the U.S. rose by 149,000 to 5.53 million in September from a revised 5.38 million in the month before.

“With a hike in December looking almost certain, it’s only normal to see some flight away from risk assets,” said Pedro Ricardo Santos, a broker at X-Trade Brokers DM SA in Lisbon. “Earnings season is drawing to a close and a few companies have actually done better than expected -- maybe the end of the year won’t be as bad as we thought.”

Equity strategists project the index can squeeze out a further 5 percent of gain from today’s close to end the year at the 2,150 level, according to the average forecast compiled by Bloomberg. The advance would push the benchmark ahead of its May record and round up a fourth consecutive year of gains.

With most S&P 500 members having already reported earnings this season, 73 percent beat profit expectations while only 44 percent topped sales projections. Analysts are now predicting a 3.8 percent drop in profits for the third quarter, an improvement on estimates for a 7.2 percent slide at the start of the season.

Commodity Stocks

All 10 major industries in the S&P 500 dropped today, with commodities shares tumbling more than 2 percent. The Chicago Board Options Exchange Volatility Index jumped 14 percent to 18.37, its highest level in a month. The measure of market turbulence known as the VIX is rebounding after its biggest monthly drop ever in October.

“Fundamentals are taking a little bit of a back seat to some of the central bank talk and activity,” said Sean Lynch, co-head of global equity strategy for Wells Fargo Investment Institute. “We’re starting to see a little bit of cracks in emerging markets and some worries over the strength of the dollar. Certainly I think China is the big weight on commodities, but there’s other factors that are causing this headwind to commodities, like the dollar.”

Energy companies in the benchmark index retreated 2.4 percent, falling for the sixth time in seven sessions. Oil dropped to the lowest level in more than two months after U.S. crude stockpiles increased for a seventh week, prolonging a global surplus. Exxon Mobil Corp. fell 2.7 percent, while ConocoPhillips and Valero Energy Corp. lost at least 2.4 percent.

Freeport-McMoRan fell to its lowest since Aug. 26 amid its longest losing streak since that date, as the raw-material group had its worst drop in a month. Copper sank to its cheapest since 2009. Alcoa Inc. slid 3.2 percent to a two-year low, while International Paper Co. decreased 3.9 percent.

Caterpillar Falls

Caterpillar Inc. was the worst performer among Dow components, declining 4.5 percent to fall the most in seven weeks. Canada’s Finning International Inc., the largest dealer of Caterpillar’s heavy machinery, announced plans to close plants and deepen workforce cutbacks amid slumping demand.

Among other companies moving on corporate news, Advance Auto Parts Inc. shares dropped 15.4 percent, the most in three years, following weaker-than expected third-quarter results, and as the company said Chief Executive Darren Jackson will step down. The auto-parts chain has been under pressure from activist investor Starboard Value since late September.

Kohl’s Corp. gained 6.1 percent, the most in nine months, after its quarterly profit and sales beat analysts’ estimates. The announcement was a surprise after Macy’s Inc., the largest U.S. department-store company, yesterday missed sales estimates and cut its profit outlook. Kohl’s advance today erases a 5.4 percent drop Wednesday amid the Macy’s fallout.

Nordstrom Inc. climbed 1.9 percent, after rising as much as 3.5 percent, to recover part of its loss yesterday. Those gains may be short-lived. The shares tumbled 15 percent in late trading as of 4:41 p.m. after third-quarter earnings missed analysts’ estimates, renewing concerns about a slump in the department-store industry.

Viacom Inc. rose 0.9 percent, despite underwhelming fourth-quarter results, after executives predicted increasing advertising revenue and higher affiliate fees. They pointed out that six of the media company’s top 10 networks are seeing audience growth. Shares earlier rose as much as 4.7 percent.

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