U.S. stocks decline as economic data fuel Fed stimulus speculation

U.S. stocks declined a fifth day after improving economic data boosted bets the Federal Reserve will curb its monthly bond purchases sooner than estimated.

Microsoft Corp. fell 2.7% after comments from a Ford Motor Co. director indicated Chief Executive Officer Alan Mulally would not take over Microsoft’s top job. Safeway Inc. slid 4% after Jana Partners LLC cut its stake in the supermarket chain. J.C. Penney Co. lost 9.4% after hedge fund manager J. Kyle Bass said he sold his stake in the struggling retailer.

The Standard & Poor’s 500 Index fell 0.5% to 1,783.50 at 3:01 p.m. in New York. The gauge has retreated 1.3% in the past five sessions for its longest slump since September. The Dow Jones Industrial Average dropped 73.60 points, or 0.5%, to 15,816.17. Trading in S&P 500 stocks was 2.9% above the 30-day average at this time of day.

“The numbers today pave the way for the Fed” to cut stimulus, Matthew Kaufler, a portfolio manager at Federated Investors Inc. in Rochester, New York, said by phone. His firm oversees $363.8 billion. “There’s angst in the short run, but I think it’s only positive in the long run that the Fed begin to taper and extricate itself from being the ultimate market maker.”

The S&P 500 has surged 25% this year, poised for the biggest annual gain in a decade, as the Fed refrained from reducing its monthly bond purchases and corporate earnings surpassed estimates. The central bank has said it will start slowing the pace of stimulus if the economy improves in line with its forecasts.

GDP Growth

The U.S. economy expanded in the third quarter at a faster pace than initially reported, led by the biggest increase in inventories since early 1998. Gross domestic product climbed at a 3.6% annualized rate, up from an initial estimate of 2.8% and the strongest since the first quarter of 2012.

A separate report showed applications for U.S. employment benefits decreased to 298,000 in the week ended Nov. 30. The median forecast of 41 economists surveyed by Bloomberg called for an increase to 320,000.

The S&P 500 fluctuated yesterday before closing lower by 0.1%, as better-than-forecast payroll data that fueled tapering concerns outweighed optimism that lawmakers in Washington were close to a budget deal. Data tomorrow may show the unemployment rate fell to 7.2%, matching the lowest level since 2008.

Lockhart Comments

Fed Bank of Atlanta President Dennis Lockhart, a backer of record stimulus, said any decision to taper bond purchases should be accompanied by a limit on the size of the program or a timetable for ending it.

“If and when the FOMC arrives at a decision to wind down asset purchases, it’s my view that it will be helpful to the transition process to provide as much certainty as possible about how this will be done,” Lockhart said in a speech today.

Policy makers, who next meet Dec. 17-18, will probably wait until the March 18-19 Federal Open Market Committee session before reducing monthly bond purchases to $70 billion from $85 billion, according to the median estimate in Bloomberg’s latest survey of economists conducted on Nov. 8.

U.S. budget negotiators plan to work this weekend on a possible deal to ease automatic spending cuts to just one year amid objections from affected groups and lawmakers in both parties, said people familiar with the talks. The bipartisan panel of 29 members has a self-imposed Dec. 13 deadline for a plan. Federal spending authority expires on Jan. 15.

Equity Valuations

The S&P 500’s rally this year has pushed valuations higher, with the equity benchmark trading for about 16.1 times its constituents’ projected earnings, up 23% from the beginning of 2013 when it traded at 13.1 times projected profit.

The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options known as the VIX, rose 4.2% to 15.32, the highest level in six weeks. The measure has rallied eight straight sessions, its longest advance since April 2012.

All 10 main S&P 500 industries fell today. Phone stocks paced declines with a 1.1% retreat. Verizon Communications Inc. slipped 1.2% to $48.80.

An S&P index of diversified financial firms fell 1.1% for the biggest drop in the equity gauge. Morgan Stanley lost 2.8% to $30.26 and JPMorgan Chase & Co. dropped 1.9% to $56.08.

U.S. regulators plan to vote Dec. 10 to adopt the final version of the Volcker rule, a key part of the Dodd-Frank Act that bans banks from making speculative bets with their own money. Treasury Secretary Jacob Lew left open during a speech today the possibility that he may push for tougher financial rules.

‘Further Action’

“If, in the future, we need to take further action, we will not hesitate,” Lew said, referring to his effort to end the notion that some financial companies are “too big to fail.”

Microsoft dropped the most in the Dow, losing 2.7% to $37.90. Mulally, 68, who has reversed Ford’s fortunes since arriving in 2006, is not leaving the automaker until the end of next year, said Edsel Ford II, a company director. Ford rose 0.5% to $16.71.

Microsoft’s board is looking for a replacement for longtime CEO Steve Ballmer, who said in August that he will retire within the next 12 months.

Costco Wholesale Corp. dropped 1.4% to $121.21 and L-Brands Inc. fell 1.4% to $62.38. The retailers posted November same-store sales that trailed analysts’ projections amid steep discounts to entice wary shoppers.

Penney, Safeway

J.C. Penney lost 9.4% to $8.75, extending its two- day slide to 14%. Bass’s Hayman Capital Management LP said he sold his stake. Hayman in September disclosed it owned about 5.2% of the stock outstanding at the time.

Safeway Inc. fell 4% to $32.84. Jana Partners cut its stake in the grocery chain to about 4.1%. The investor reported a 6.2% holding in the retailer on Sept. 17.

Electronic Arts Inc. tumbled 5.4% to $21.14 for the steepest drop in the S&P 500. Pacific Crest analyst Evan Wilson said potential delays releasing a new version of the “Battlefield” game franchise may hurt results.

Dollar General Corp. increased 6.2% to $59.88 for the biggest gain in the S&P 500, after raising its full-year earnings forecast. The discount retailer reported third-quarter profit of 72 cents per share, beating analyst estimates of 70 cents per share in the quarter.

General Growth Properties Inc. rose 3.2% to $20.93. The company will replace Molex Inc. in the S&P 500 after the close of trading on Dec. 9, according to a statement late yesterday.

Puma Biotechnology Inc. soared 66% $76.75 after saying its experimental breast-cancer drug is likely to progress to the third and final stage of clinical trials usually needed before winning regulatory approval.

www.bloomberg.com

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