U.S. Stocks Fall as Small Caps Sink; Bond Yields Decline

U.S. stocks fell for the first time in three days after retailers reported lower-than-estimated earnings and small-cap shares slumped. Treasuries advanced, the yen approached a three-month high and corn dropped.

The Standard & Poor’s 500 Index lost 0.7 percent at 4 p.m. in New York. The Russell 2000 Index of small companies sank 1.5 percent. The MSCI Emerging Markets Index lost 0.5 percent after closing yesterday at the highest since October. The yield on 10-year Treasury notes fell three basis points to 2.51 percent, near a six-month low. The yen strengthened against all of its 16 major peers as the Bank of Japan began a two-day meeting. Nickel dropped 1.2 percent after yesterday rising the most in 20 months.

Dick’s Sporting Goods Inc. and Staples Inc. led retailers in the S&P 500 lower by 1 percent after issuing forecasts that fell short of analysts’ estimates. Federal Reserve Bank of Philadelphia President Charles Plosser said labor-market gains may mean the Fed will need to begin raising interest rates “sooner rather than later.” The BOJ meets amid forecasts by 44 percent of economists in a Bloomberg News poll of additional stimulus by the end of the July gathering.

“What we’re seeing is a re-assessment of the growth prospects of earnings,” Brad McMillan, the chief investment officer for Commonwealth Financial Network, said by phone. His firm oversees $83 billion. “It’s not a question of ‘are we going to grow?’ Because we are. It’s ‘are we going to grow as fast as we thought we would?’”

Retail Forecasts

Investors are favoring fixed income over equities as concern over valuations roiled stocks from small-cap companies to Internet shares. Exchange-traded funds that buy American bonds attracted $138.8 million yesterday while $2 billion was taken out of equity ETFs, data compiled by Bloomberg show. That reversed year-to-date equity ETF flows and drove withdrawals for the quarter to $711 million. Should the trend continue through June, that would be the first quarterly deficit since the three months ended March 2010, the data show.

The Russell 2000 fell 1.9 percent over three days last week before rebounding 0.6 percent on May 16 and a further 1 percent yesterday. The gauge is 9.2 percent below its record from March.

Treasuries gained for the first time in three days as risk appetite ebbed before the Fed releases tomorrow minutes from its last meeting.

Fed Bank of New York President William Dudley said an expected pickup in growth will gradually lift the bank’s inflation benchmark closer to its 2 percent target, and that the pace of eventual interest-rate increases “will probably be relatively slow.”

Fed Officials

Plosser said the strongest U.S. economy in years, buoyed by a solid housing market, may push the jobless rate below 6 percent by year-end.

The central bank cut monthly bond purchases for the fourth consecutive time at its last meeting. Three rounds of asset buying have helped the S&P 500 rally as much as 180 percent from a March 2009 low.

“People are trying to get a handle on what exactly the Fed’s reaction function is on when they are raising rates,” Walter Todd, who oversees about $980 million as chief investment officer at Greenwood Capital Associates LLC, said by phone. “The problem for them there is I don’t know if they even know themselves.”

Japan’s currency added 0.3 percent to 101.24 per dollar. It reached 101.10 yesterday, the strongest since Feb. 5. The euro dropped 0.4 percent to 138.62 yen.

Australia’s dollar dropped to a two-week low as the Reserve Bank of Australia’s May meeting minutes signaled it was likely to maintain record-low interest rates.

Commodities Moves

The S&P GSCI gauge of 24 commodities added 0.2 percent as coffee and cocoa rallied at least 1.4 percent.

Gold futures rose a second day as lower equity prices boosted demand for alternative investments. The metal added 0.1 percent to settle at $1,294.60. Wheat advanced the most in two weeks after a government report yesterday showed crop conditions deteriorated.

Nickel dropped to $19,855 a ton in London after yesterday rising 5.7 percent, the most since September 2012. Copper fell 1 percent. Corn sank as low as $4.7425, the least for a most-active contract since March 11.