U.S. Stocks Slide Amid Concern Higher Rates Will Weigh on Growth

Market-Sensitive Fed Looks for Rate Hike Confidence
  • Banks, tech shares join in selling after rallying yesterday
  • Fed’s Lacker, Dudley signal economy on track for rate boost

U.S. stocks declined, with the S&P 500 falling to a seven-week low, amid concern that a Federal Reserve interest-rate increase as early as next month could further burden a struggling global economy.

Equities pared losses in an afternoon comeback as a dollar gauge trimmed its climb. The Fed’s hawkish commentary in meeting minutes yesterday has bolstered dollar gains, pressuring commodity prices as well as multinational companies whose overseas sales may be dented by a stronger U.S. currency. Wal-Mart’s strongest rally in seven years on better-than-estimated earnings offered some support to optimism that the American economy may be sturdy enough to handle higher rates.

The S&P 500 fell 0.4 percent to 2,040.04 at 4 p.m. in New York, erasing a 2016 gain that had approached 3 percent. The Dow Jones Industrial Average sank 91.22 points, or 0.5 percent, to 17,435.40, and has now gone a year since it last reached an all-time high. The Nasdaq Composite Index slipped 0.6 percent. About 7.2 billion shares traded hands on U.S. exchanges, 3 percent below the three-month average.

“The weakness is a continuation of yesterday and the threat of higher interest rates, either real or perceived,” said Terry Morris, a senior equity manager who helps oversee about $3.2 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust Co. “The economy is fragile, and a hike in interest rates could send it over the edge. There’s a fear that if rates do go up, the economy won’t be able to support it.”

Minutes from the Fed’s April meeting indicated policy makers’ willingness to raise interest rates in June if the economy continues to improve, sending the S&P 500 on Wednesday to its widest intraday swings in three weeks. Some meeting participants expressed concern that markets were ill-prepared for rate boost next month.

This week’s vault in expectations for higher rates has dealt another blow to sentiment that was already brittle amid slumping corporate earnings. The S&P 500 rallied 15 percent between a February low and a four-month high on April 20, but has slipped 3 percent since then, losing momentum last month amid disappointing results from technology giants Apple Inc. and Microsoft Corp., as well as recent letdowns from a handful of major retailers including Macy’s Inc. and Target Corp.

“The minutes from the most recent meeting could very well be interpreted as more hawkish and June or July are very much in play,” said Eric Wiegand, senior portfolio manager at the New York-based Private Client Reserve of US Bank, which oversees $128 billion in assets. “The reaction yesterday was somewhat muted and the follow-on shows people are still processing that. The volatility in commodities prices is also a byproduct of those concerns about higher rates.”

Volatility Climbs

The CBOE Volatility Index climbed 2.4 percent to 16.33, a two-month high. The measure of market turbulence known as the VIX is headed toward a second consecutive weekly gain for the first time since the S&P 500 reached a 22-month low in February.

In contrast to Thursday’s downdraft, Wal-Mart surged the most since 2008 after better-than-estimated first-quarter results assuaged some fears that the retail industry is mired in a slump. Urban Outfitters Inc. jumped 14 percent after its results topped predictions, and Cisco Systems Inc. rose 3.2 percent, the best since Feb. 11, after its results and forecast topped predictions. Monsanto Co. gained 3.5 percent after an unsolicited acquisition offer from Germany’s Bayer AG.

With attention riveted on the central bank, New York Fed President William Dudley said Thursday the central bank is moving closer to raising rates at one of its next two meetings and the fact this message is getting through to financial markets is welcome news. Richmond Fed’s Jeffrey Lacker also talked up the prospect for an imminent increase, saying during an interview on Bloomberg Radio that there’s a strong case for raising rates next month.

Traders now price in a 30 percent chance of higher borrowing costs next month, up from 4 percent at the start of this week. Odds for a July move are 48 percent, while September is the first month with at least an even chance of higher rates.

Investors “are understandably concerned after the Fed minutes,” said Mike Ingram, a strategist at BGC Partners in London. “Growth isn’t looking great and equities are still going to struggle. It’s important for the Fed to reaffirm the underlying strength of the U.S. economy if it’s really considering a rate hike in June.”

Data Watch

As policy makers scrutinize data that will guide their rate decisions, a report today showed filings for unemployment benefits declined last week from a more than one-year high, as a plunge in New York returned claims to a level consistent with a firm labor market. A separate measure showed manufacturing activity in the Philadelphia region unexpectedly contracted this month. Also, a gauge of leading indicators last month rose more than economists forecast.

With the reporting season winding down, analysts estimate first-quarter income at S&P 500’s companies declined 7.4 percent, compared to calls for flat growth earlier this year. So far, 75 percent of those that have reported beat profit estimates, while 54 percent surpassed sales predictions.

In Thursday’s trading, six of the S&P 500’s 10 main industries fell, led by declines of at least 0.8 percent for health-care, financial and industrial companies. Utilities gained 0.9 percent, springing back from a two-day, 3.6 percent drop, while consumer staples added 0.8 percent.

Industrials Sink

Industrial stocks tumbled 1 percent to levels last seen in March. General Electric Co. paced the selloff, falling to a two-month low. Boeing Co. lost 2.2 percent, the most since Feb. 11. Delta Air Lines Inc. and United Continental Holdings Inc. lost at least 1.7 percent in the wake of the crash of an EgyptAir flight.

Financial companies slipped 0.9 percent, erasing about half of Wednesday’s rally. The S&P 500 REITs Index fell 1 percent to a two-month low. Twenty-two of 24 lenders in the KBW Bank Index sank, led by declines of more than 1.7 percent for Regions Financial Corp. and Citigroup Inc. The gauge yesterday rallied the most in five weeks amid speculation higher rates would lift banks’ profits. Treasury yields fell today after surging by the most since March 1 on Wednesday.

Technology shares slipped, alternating between gains and losses for a fifth day. Microsoft Corp. was the biggest drag on the group, falling 1 percent. Google parent Alphabet Inc. decreased 0.9 percent and Oracle Corp. lost 1.6 percent to also weigh. More than half of last year’s revenue at both companies came from outside the U.S., making them vulnerable to the stronger dollar.

Consumer staples bounced after falling to a three-week low yesterday. Wal-Mart’s 9.6 percent surge led the recovery, while Kraft Heinz Co. added 2.2 percent after losing 5.5 percent over the prior two sessions. Kroger Co. and Archer-Daniels-Midland Co. increased at least 1.3 percent.

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