U.S. Stocks Retreat as Nasdaq Tumbles; Treasuries Advance

U.S. stock retreated, with the Nasdaq Composite Index sliding the most in two months, as concern grew that equities have rallied too far too fast amid an uneven global economic recovery. European shares fell for a third day, while Treasuries gained.

The Nasdaq Composite slid 1.4 percent at 4 p.m., and the Standard & Poor’s 500 Index slipped 0.7 percent after falling from a record yesterday. The Stoxx Europe 600 Index tumbled 1.4 percent, the most since April 11, while the MSCI All-Country World Index decreased 0.7 percent. The Chicago Board Options Exchange Volatility Index extended its gain this week to 16 percent, the biggest two-day advance since April. The rate on 10-year Treasuries dropped five basis points to 2.56 percent. Brent crude slid the most in more than two months.

Twitter Inc. and Pandora Media Inc., which trade at more than 150 times projected earnings, plunged at least 7 percent to lead declines in Internet stocks. Alcoa Inc. jumped 1.7 percent in late trading after the aluminum producer reported second-quarter earnings and sales that beat analysts’ estimates. U.K. manufacturing unexpectedly slumped the most in 16 months in May and German exports contracted more than estimated, data showed today.

“Many investors wonder if the ride is over,” Tobias Levkovich, chief U.S. equity strategist at Citigroup Inc., said in a report today. “As stock indices hit new highs, there are those that fear further gains, given defensive positioning, but more worry about buying in now just in time for a severe pullback.”

U.S. Earnings

U.S. benchmark indexes ended last week at all-time highs, with the Dow Jones Industrial Average topping 17,000 for the first time. The Russell 2000 Index of smaller companies recovered nearly all its losses from a selloff in March and April, coming within a point of its record on July 3. Gauges of Internet and biotechnology companies also climbed back from the year’s lows, retracing more than half of their earlier losses.

Small-caps and Internet shares were the biggest victims of the market retreat earlier this year as investors dumped the biggest winners of the bull market amid concern valuations advanced too far. Investors resumed selling those industries this week after valuations on the Nasdaq Composite rallied to 35 time reported earnings, about double that of the S&P 500.

The Dow Jones Internet Composite Index tumbled 3 percent today, the most since May 6. Facebook Inc. and TripAdvisor Inc., which rallied more than 98 percent in 2013, lost at least 3.9 percent today. The Internet index had rallied 15 percent from a low on May 8 to erase its losses for the year before the current two-day selloff. It surged 54 percent in 2013.

The Nasdaq Biotechnology Index has fallen 4.6 percent in the past two days, the most since April. It had rallied 23 percent since a low that month.

Lofty Ratios

“There’s clearly some profit-taking in names that have done extremely well,” Peter Tuz, who helps manage more than $450 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said in a phone interview. “Some of the stocks have pretty lofty P/E ratios, so if anything does go awry with earnings or guidance, they could have bigger declines.”

The CBOE Volatility Index, the measure known as VIX that tracks investors’ volatility expectations for the S&P 500, jumped 9.8 percent yesterday from a seven-year low. The index added 5.7 percent to 11.98 today.

Three rounds of monetary stimulus from the Fed and better-than-forecast corporate earnings have driven the S&P 500 up more than 190 percent from a low reached in March 2009. The S&P 500 is trading at 16.6 times the projected earnings of its members, above the five-year average valuation of 14.3.

12 Percent

“I do think we are vulnerable to a 10 percent to 12 percent decline in the weeks ahead, albeit within the construct of a secular bull market that has years left to run,” Jeffrey Saut, chief investment strategist at Raymond James wrote in a post on the firm’s website.

Alcoa, the largest American aluminum producer, unofficially kicked off earnings season with its report after the market closed. Profit beat forecasts after an increase in the price of aluminum including regional delivery premiums. Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs, Yahoo! Inc. and Johnson & Johnson are among companies reporting financial results in the next week.

Profit at companies in the S&P 500 probably increased 5 percent in the three months through June, while sales rose 3 percent, estimates compiled by Bloomberg show. The forecasts are lower than they were at the beginning of April, when analysts projected earnings to rise 7.3 percent and sales to increase 3.7 percent.

Thinner Air

“Equities are near all-time highs and the air will only get thinner,” said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG in Bonn, Germany. “We need a strong results season now to support equities because investors will keep wondering when the Fed will hike rates and this can bring some nervousness to the market.”

Treasuries gained, with the yield on 10-year notes dropping the most in almost three weeks, as traders bet the declines after a stronger-than-forecast employment report were overdone as the pace of the recovery remains uneven. The U.S. sold $27 billion of three-year notes as the highest auction yield since May 2011 attracted investors.

Goldman Sachs Group Inc. yesterday joined banks including JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in bringing forward it estimates for Fed rate increases after data last week showed the economy added 288,000 workers in June, compared with the 215,000 projected by a Bloomberg survey of analysts.

Target Rate

Fed policy makers have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. Traders see about a 70 percent chance officials will raise the key rate from near zero by September 2015, Fed funds futures show.

While data from employment to housing is indicating the world’s largest economy is recovering after the worst contraction in gross domestic product since 2009, International Monetary Fund Managing Director Christine Lagarde this week signaled a cut in the institution’s global expansion forecasts, saying investment is still weak and risks remain in the U.S.

The Stoxx 600 fell to the lowest level since May 20, extending a three-day loss to 2.6 percent. More than 12 shares declined for every one that advanced, with trading volumes 19 percent higher than the 30-day average, according to data compiled by Bloomberg.

European Stocks

Commerzbank AG, Germany’s second-largest lender, slid 5.6 percent after a person familiar with the situation said the lender will probably be the next bank to resolve alleged U.S. sanctions violations. Air France-KLM Group lost 8.7 percent after Europe’s largest airline cuts its full-year earnings forecast.

U.K. factory output plunged 1.3 percent from April, the most since January 2013 and the first decline in six months, the Office for National Statistics said today. German exports fell 1.1 percent in May, worse than estimates for a 0.4 percent decline.

“Stocks have had a good run and people may have gotten a bit carried away, now might be a good time to take some profit,” Peter Dixon, global equities economist at Commerzbank in London, said by phone. “Second-quarter numbers for Germany and perhaps the U.K. may be below where we might have expected them a couple of weeks ago.”

Russia’s Micex advanced 0.2 percent, paring an earlier rally of 1.2 percent. Ukrainian rebels seized a town in the Luhansk region after a retreat from eastern strongholds as European Union states considered expanding a list of Russians facing sanctions as soon as tomorrow. Ukraine’s army has had the biggest victories of a three-month campaign over the past few days, retaking the towns of Slovyansk and Kramatorsk.

Emerging Markets

Israel’s benchmark index declined 1 percent to the lowest level in four months as the country’s military struck 50 targets by air and sea in the Hamas-controlled Gaza Strip following overnight rocket attacks.

Indonesia’s Jakarta Composite Index rose 0.7 percent on speculation market favorite Joko Widodo will win tomorrow’s presidential election. That followed a 1.7 percent gain yesterday.

Higher-yielding currencies climbed against the dollar as the prospects of higher interest rates in Indonesia and Malaysia and an end to a labor dispute in South Africa boosted demand for emerging-market assets.

A gauge of 20 major emerging-market currencies gained 0.2 percent to 92.89, the biggest rally in almost three weeks. The dollar weakened 0.3 percent to 101.57 yen and was little changed at $1.3611 per euro.

Brent declined 1.2 percent for a seventh day of losses, the longest slump since October 2012. Futures reversed a rally that started almost a month ago when Islamist militants seized the northern Iraq city of Mosul. West Texas Intermediate oil was little changed, after seven days of losses, the longest streak since December 2009.

Zinc climbed 1.1 percent to $2,279.75 a metric ton, the highest since August 2011.

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