U.S. Stocks Slip From Highest This Year as Rally Loses Momentum

Global Economy Imbalanced on Inflation Divergence
  • Equities slip from 2016 highs, VIX rises from 7-month low
  • Virgin America surges 42% on buyout by Alaska Air Group

U.S. stocks slipped from their highest levels this year, with declines in consumer and industrial shares overshadowing gains in health-care companies, as investors looked for fresh reasons to continue a rally.

Equities lost momentum after after capping a sixth weekly gain in seven. Ford Motor Co. and General Motors Co. fell more than 1.8 percent to the lowest in more than a month, sliding for a second day after disappointing March sales. Miner Freeport-McMoRan Inc. lost 4.8 percent as copper capped its longest losing streak in two years. Virgin America Inc. jumped 42 percent after Alaska Air Group Inc. agreed to buy the carrier for $2.6 billion.

The Standard & Poor’s 500 Index dropped 0.3 percent to 2,066.13 at 4 p.m. in New York, the biggest slide in more than a week. The Dow Jones Industrial Average lost 55.75 points, or 0.3 percent, to 17,737. The Nasdaq Composite Index declined 0.5 percent. About 6.4 billion shares traded hands on U.S. exchanges, 25 percent below the 2016 average.

“There’s a big divergence in opinion right now over whether this rally is a head fake or not,” said Craig Sterling, head of U.S. equity research at Pioneer Investments in Boston. “Stocks have gone up on not a lot of volume and we’re kind of at an inflection point right now. If we see a leg down in oil or bad macro data, or the rate trade doesn’t go the right way for equities, then we’re back to where we started the year.”

The main U.S. equity benchmark retreated after extending 2016 gains on Friday, an advance that came amid reports showing the pace of job creation remained robust and manufacturing activity improved. That bolstered confidence in the economy, while central banks have signaled they will continue their efforts to support growth.

The S&P 500 staged a rebound in the second half of the last quarter, erasing losses of as much as 11 percent, helped by a rally in crude oil and easing concerns that a global slowdown will deepen. Still, recent gains have come in light trading, with the benchmark going its longest without a daily move of 1 percent in more than a year. The index was about 3 percent from a record reached last May, and is one of three developed-market
indexes that has erased losses for the year.

Meanwhile, the Chicago Board Options Exchange Volatility Index rose 7.8 percent Monday to 14.12, the most in five weeks. The measure of market turbulence known as the VIX
closed Friday at the lowest since August, 26 percent below its average over the past year.

Following Fed Chair Janet Yellen’s reassurance last week that the pace of future rate increases will be gradual, traders are pricing in zero possibility of a hike at the end of April, with December now the first month with at least even odds of higher borrowing costs. A report today showed a measure of factory orders declined in February, suggesting business investment will be a drag on growth again in the first quarter. Minutes from the Fed’s meeting last month are due for release on Wednesday.

Earnings Outlook

Attention will begin shift more toward corporate earnings, with Alcoa Inc. unofficially kicking off the reporting season when it releases first-quarter results on April 11. Analysts estimate profit at S&P 500 firms fell 9.5 percent during the period, compared with forecasts for flat earnings growth at the beginning of the year. The S&P 500 now trades at its highest valuation since July, based on 12-month projected earnings.

Strategists at Jefferies Group LLC see more room for stocks to rise, citing in part the low expectations for earnings which should make it easier for companies to produce surprises. “The bottom line is that with the Fed dovish, stock market investors skeptical and earnings set to be revised up, investors should guard against the risk of an upside breakout in stocks,” wrote the team led by Sean Darby, chief global equity strategist, in a note today. “The question then will be whether last May’s top remains intact.”

Eight of the S&P 500’s 10 main industries fell Monday, with industrial, raw-materials and consumer discretionary companies losing at least 0.8 percent. Health-care shares gained 1 percent to the highest in almost three months, boosted by drug developers.

GE Falls

General Electric Co. sank 2.2 percent, the most in seven weeks, after Sanford C. Bernstein & Co. Inc. downgraded the shares to the equivalent of neutral from buy, citing valuation. The stock had rallied more than 16 percent from a February low and was up 28 percent compared to a year ago. Caterpillar Inc. fell 1.4 percent to snap a six-day winning streak.

Among consumer companies, PulteGroup Inc. lost 6.6 percent, the most since October, as the company’s chief executive officer plans to step down after pressure from the homebuilder’s founder. Richard Dugas will retire next year after more than a decade as CEO, according to a statement.

Parts makers BorgWarner Inc. and Delphi Automotive Plc slid at least 3.8 percent. Wells Fargo Securities LLC analyst Richard Kwas wrote in a note that a report the stocks may be weighed by concerns about long-term European Union pollution targets expected next year. Nike Inc. dropped 2.6 percent to a three-week low, with the shares falling below their average prices during the past 50 and 200 days.

Consumer staples in the benchmark retreated from an all-time high. J.M. Smucker Co. fell 3.7 percent, the most in 10 months, after Goldman Sachs Group Inc. downgraded the shares to sell. Hershey Co. and Archer-Daniels-Midland Co. decreased more than 1.1 percent.

Facebook, Yahoo

Facebook Inc. slid 3 percent, the most in almost two months. The company is in an “unfavorable set up” going into earnings, according to Deutsche Bank AG analyst Ross Sandler. Quarterly revenue expectations are high and may lead to temporary weakness, though investors should view a decline in the stock as a buying opportunity, the analyst wrote.

Apple Inc. rose for the fourth time in five sessions, climbing 1 percent, while Yahoo! Inc. advanced 1.5 percent to the highest since August. Reuters reported late Friday that Time Inc. is said to consider partnering with a private-equity firm on a bid for Yahoo’s core Internet assets.

Edwards Lifesciences Corp. surged 17 percent to an all-time high, pacing the climb in health-care after a study offered evidence on the benefits of its newest aortic valve.
Allergan Plc and Vertex Pharmaceuticals Inc. rallied more than 3.5 percent as drug developers climbed for a third day. The Nasdaq Biotechnology Index rose 0.9 percent, after climbing as much as 2.4 percent.

Pfizer Inc. and Merck & Co. Inc. increased at least 1.3 percent. Health-care companies had the smallest March increase of the S&P 500’s main groups, and are one of two -- along with financials -- to still hold losses for the year.

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