Stocks Fall as Dollar Reverses Drop on Bets Fed to Taper

U.S. stocks fell, pulling benchmark indexes down from records, and the Dollar Index reversed losses as Federal Reserve officials discussed scaling back stimulus efforts. Gold futures extended the longest slump since 2011.

The Standard & Poor’s 500 Index slipped 0.5 percent to 1,650.47 at 4 p.m. in New York after reaching records in nine of the 10 previous sessions. The gauge of the U.S. currency against six trading partners was little changed at 83.80 after earlier retreating as much as 0.5 percent from the highest level since July. Ten-year note yields fell six basis points to 1.88 percent. Oil rose 0.9 percent to $95.16 a barrel, while gold fell 0.7 percent to $1,386.90 an ounce.

The Fed may reduce its $85 billion in monthly bond-buying as early as this summer amid signs the economy is gaining strength, Fed Bank of San Francisco President John Williams said. Three other regional Fed presidents called for phasing out monthly purchases of $40 billion in mortgage securities. Data earlier showing a jump in jobless claims, a plunge in housing starts and a drop in consumer prices had spurred speculation the Fed would be in no hurry to taper purchases.

“It’s unlikely the Fed is going to tighten monetary policy before the end of this year at the earliest, but that doesn’t mean stocks can’t have a sloppy day because some people think it’s going to happen imminently,” Philip Orlando, chief equity strategist at Federated Investors, which has about $380 billion, said by telephone. “There are large swaths of market participants who believe the only reason for the stock market to be up 145 percent over the past four years is because of central bank intervention.”

Market Leaders

Wal-Mart Stores Inc., Home Depot Inc. and Walt Disney Co. dropped more than 1.4 percent to lead declines in the Dow Jones Industrial Average, sending the 30-stock gauge down 42.47 points to 15,233.22. Gauges of consumer, health-care, utility and financial stocks fell at least 0.7 percent for the biggest declines among the 10 main industries in the S&P 500, while technology stocks gained.

Cisco Systems Inc. surged 13 percent, the most since August 2011, as the biggest maker of networking equipment reported fiscal third-quarter profit that topped estimates. Wal-Mart slipped 1.7 percent after forecasting second-quarter earnings of $1.22-$1.27 a share, compared with a $1.29 analyst estimate.

Warren Buffett’s Berkshire Hathaway Inc. slipped 1.1 percent after having its credit grade cut one level by S&P as the ratings company revised its criteria for evaluating insurers.

Economic Data

An S&P gauge of homebuilders slid 1.9 percent as all 11 stocks in the index retreated, trimming the group’s year-to-date advance to 21 percent. Housing starts slumped 16.5 percent, the most since February 2011, to an 853,000 annualized rate, the Commerce Department reported. The median estimate of 81 economists surveyed by Bloomberg was for a 970,000 rate.

Jobless claims jumped by 32,000 to 360,000 in the week ended May 11, exceeding all forecasts in a survey. The consumer-price index decreased 0.4 percent, the biggest decline since December 2008, after falling 0.2 percent in March, according to Labor Department figures. Economists predicted a 0.3 percent drop.

The cost of living fell in April for a second month, the first back-to-back declines in inflation since late 2008, reports showed today. Another report from the Fed Bank of Philadelphia showed manufacturing in that region unexpectedly contracted in May for the first time in three months.

Fed Speakers

Dallas Fed President Richard Fisher said today buying mortgage bonds risks disrupting the market, while Philadelphia Fed President Charles Plosser said, “it’s not good for the bank to be holding lots of mortgage paper.” Jeffrey Lacker of Richmond said to reporters yesterday the Fed should “get out of the credit allocation business.”

“It’s clear that the labor market has improved since September” when the Fed began its third round of asset purchases, Williams said today in the text of a speech in Portland, Oregon. “We could reduce somewhat the pace of our securities purchases, perhaps as early as this summer” and end the program late this year.

The stimulus from the Fed has helped send the S&P 500 up 16 percent this year and as much as 145 percent from its bear-market low in March 2009.

Picking winners in the American equity market has seldom been easier after four years of Fed stimulus sent measures of market breadth toward unprecedented heights.

Market Breadth

The rally has pushed 193 stocks in the S&P 500, or 39 percent of the gauge, to their highest levels in at least 52 weeks as of yesterday, the most in Bloomberg data going back to 1993. The cumulative advance-decline line for stocks listed on the New York Stock Exchange, representing the number of daily gains minus declines, reached a record 63,856 yesterday.

Gains accelerate when corporate profits and the economy surprise a market dominated by skepticism, according to Laszlo Birinyi, president of Westport, Connecticut-based Birinyi Associates Inc. This year’s rally is occurring as mutual fund clients are sending five times more money to bond managers than stocks, volume on U.S. share exchanges is stuck at the lowest in at least five years, and valuations based on reported earnings are only now reaching historical averages.

“Everything is going up, it’s not just tech or industrials or dividends,” Birinyi said today in an interview with Francine Lacqua and Guy Johnson on Bloomberg Television in London. “It’s not just central banks. Earnings are good, the psychology is people are fighting the tape,” he said. “Basically the psychology is, ‘I missed it.’”

The dollar strengthened at least 0.7 percent versus the currencies of South Africa, Australia and New Zealand.

European Movers

Among European stocks, Zurich Insurance Group AG lost 3.3 percent as Switzerland’s biggest insurer reported earnings that missed estimates. Cie. Financiere Richemont SA, the maker of Cartier jewelry, rallied 7.6 percent to a record as the company posted profit topped projections and boosted its dividend.

Spain’s 10-year yield declined three basis points to 4.31 percent and Italy’s rate slid three points to 3.98 percent after the nations sold 13 billion euros ($16.7 billion) of debt via banks.

The MSCI Emerging Markets Index was little changed. Russia’s Micex slipped 1.3 percent, declining for a fifth day in the longest losing streak in a month, and Brazil’s Ibovespa dropped 0.4 percent as it halted a two-day rally. Asseco Poland SA, central Europe’s largest software maker, dropped 3.7 percent to lead Poland’s benchmark gauge lower after MSCI Inc. said it will cut the stock from its country index.

Shanghai Rally

The Shanghai Composite Index added 1.2 percent after trading at its biggest discount to global markets in more than three years, while the Hang Seng China Enterprises Index of mainland companies listed in Hong Kong slid 0.6 percent. Foreign direct investment unexpectedly slowed to a 0.4 percent gain last month, missing the 6.2 percent average estimate of eight economists surveyed by Bloomberg and down from a 5.7 percent advance in March.

Gold for June delivery slid for a sixth day, the longest streak since December 2011, as filings showed billionaire George Soros, Northern Trust Corp. and Blackrock Inc. sold the metal. WTI crude rose on speculation that central banks will bolster stimulus

Gold, down 17 percent since January, is poised to lose 20 percent in a year as inflation fails to accelerate and with the worst risks to the global economy waning, Credit Suisse Group AG said.

Gold will trade at $1,100 an ounce in a year and below $1,000 in five years, according to Ric Deverell, head of commodities research at the bank. Lower prices are unlikely to lure more central-bank buying, said Deverell, who worked at the Reserve Bank of Australia for 10 years before joining Credit Suisse in 2010.

Iron ore entered a bear market yesterday on concern that slowing growth in China, the world’s largest buyer of the steel-making raw material, will curb demand as supplies increase. Prices are down 14 percent this year.

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