U.S. Stocks Slip as Rally Wavers Amid Speculation on Rate Timing

A Historic View of S&P 500 Valuations
  • Year’s strongest-performing groups see brunt of selling
  • Earnings reports boost Foot Locker, Applied Materials, Deere

U.S. stocks slipped for the first time in three days, with a recent rally showing signs of tiring amid elevated valuations and rising speculation that borrowing costs will increase before year-end.

Investors sold this year’s winners, with phone companies capping their worst week since 2014, while utilities and energy producers also led the retreat. Better-than-estimated earnings from Deere & Co., Applied Materials Inc. and Foot Locker Inc. helped keep a lid on declines, with shares of the three surging more than 7 percent. Nike Inc. gained 3 percent, boosted by Foot Locker’s results.

The S&P 500 Index fell 0.1 percent to 2,183.87 at 4 p.m. in New York, barely erasing an advance for the week. The benchmark has gone 30 days without a 1 percent move in either direction, the longest since 2014. The Dow Jones Industrial Average lost 45.13 points, or 0.2 percent, to 18,552.57. The Nasdaq Composite Index slipped less than 0.1 percent. About 5.7 billion shares traded hands on U.S. exchanges, 17 percent below the three-month average.

“The daily movements are really a function of a fully valued market that’s trading at its highs in a narrow range,” said Ernie Cecilia, chief investment officer at Bryn Mawr Trust Co., which oversees $9.6 billion in Bryn Mawr, Pennsylvania. “One of the more major announcements this week was the Fed FOMC minutes which indicated if nothing else a lack of unanimity in the FOMC. The markets interpreted that as uncertainty which therefore means no action from the Fed. The markets are just hanging in there.”

A dovish tone in minutes released Wednesday from the last Federal Reserve meeting contrasted with hawkish remarks this week from New York Fed President William Dudley and San Francisco’s John Williams. The two sought to remind investors that a rate increase could come at any meeting, particularly if jobs data continued to improve. Fed Chair Janet Yellen will speak Aug. 26 at a meeting of global policy makers in Jackson Hole, Wyoming.

Traders’ bets on higher rates have been pushed forward with December now the first month showing at least even odds of an increase, a 51 percent probability versus 42 percent a week ago. That helped put a gauge of the dollar on track for its best gain in a month.

The recent advance in U.S. equities has lost some steam amid shifting speculation over the Fed’s timing. The S&P 500 slipped less than 0.1 percent for the week after a 9.2 percent rebound that netted 10 fresh records since the shock of the U.K. secession vote in late June. Optimism that central banks will maintain their efforts to bolster growth, better-than-forecast earnings and continued signs of a strengthening labor market have helped boost stock valuations to the highest of the seven-year bull market.

As the earnings season winds down, results have proved generally better than expected with nearly 80 percent of S&P 500 members beating profit projections, while more than half topped sales estimates. Analysts curbed their estimates for a contraction in net income to down 2.3 percent, from a 5.7 percent drop just before the reporting period began. Predictions show a 0.9 percent decline in profits for the quarter ending in September, which would be a sixth consecutive drop, the longest since the financial crisis.

“We’ve had a big rally, and there’s this correlation with oil and that’s what spooks the market,” said Patrick Spencer, London-based vice chairman of equities at Robert W. Baird, which manages $151 billion. “Earnings are key and we’ve got to watch the dollar closely. If that was to strengthen meaningfully one would need to get concerned about the U.S. market.”

In Friday’s trading, seven of the S&P 500’s 10 main industries retreated, with utilities losing 1.2 percent while phone and energy companies slid more than 0.8 percent. The three groups are the benchmark’s best performers year to date, with gains of at least 15 percent. The CBOE Volatility Index fell 0.8 percent to 11.34, wiping out a gain of more than 7 percent. The measure of market turbulence known as the VIX marked its seventh weekly decline in the last eight.

Oil and gas companies fell from a nine-month high, even as crude rose again after entering a bull market yesterday. The commodity capped its strongest weekly increase in five months. Exxon Mobil Corp. and Chevron Corp. sank at least 1.1 percent, while Kinder Morgan Inc. declined 1.9 percent. Southwestern Energy Co. slid the most, losing 4.6 percent.

Wal-Mart Stores Inc. weighed on consumer staples, dropping 2 percent to erase a rally yesterday sparked by a stronger profit forecast. Estee Lauder Cos. decreased 3.5 percent as its earnings outlook was short of estimates.

Technology shares edged higher as Applied Materials’ results and its best gain in three months lifted other semiconductor stocks. Micron Technology Inc. added 3 percent, while Lam Research Corp. gained 2.5 percent. The Philadelphia Stock Exchange Semiconductor Index rose to the highest since October 2000.

Deere surged more than 13 percent, the best since 2008, after raising its full-year profit outlook amid cost cuts. Industrials were mixed, however, with airlines slipping and Emerson Electric Co. falling 3.1 percent after agreeing to buy Pentair Plc’s valves and controls business for $3.15 billion in cash.

Ross Stores Inc. rallied 3.5 percent to a record after its results beat estimates, joining Foot Locker to buoy consumer-discretionary shares. Nike hit a three-month high, while Gap Inc. added 3.9 percent to its highest since April 7 after earnings that narrowly topped analysts’ estimates gave hope to the retailer’s comeback.

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