U.S. stocks retreat on manufacturing data as tech shares slide

U.S. stocks fell after the benchmark Standard & Poor’s 500 Index (CME:SPM14) climbed to a record last week as technology and small-cap shares resumed declines and manufacturing expanded at a slower pace than forecast in May.

Facebook Inc. and Google Inc. slid more than 1.2% to pace declines among Internet stocks. Broadcom Corp. rose 8.1% after saying it will explore options for its cellular baseband business.

The S&P 500 fell 0.2% to 1,918.98 at 10:46 a.m. in New York, after climbing 1.2% last week. The Dow Jones Industrial Average lost 15.70 points, or 0.1%, to 16,701.47 today, after also closing at a record on May 30. The Nasdaq 100 Index (NASDAQ:QTEC) dropped 0.5%.

“With the market at or near an all-time high, it may be taking a breather here,” Richard Sichel, chief investment officer at Philadelphia Trust Co., which oversees $2 billion, said in a phone interview. “The manufacturing number adds to the pause we’re seeing at the moment. As more numbers come in over the next week or so, that’ll continue to be a market driver.”

The S&P 500 has rebounded 5.7% since a selloff in small-cap and Internet shares spread to the broader market and dragged the gauge to a two-month low in April. It advanced 2.1% in May for a fourth straight monthly increase. The measure trades at 16.3 times the projected earnings of its members, up from 14.8 times four months ago.

Small Caps

The selling of shares in smaller companies and technology stocks resumed today. The Russell 2000 Index (NASDAQ:VTWO) of smaller companies tumbled 0.9%, while the Dow Jones Internet Composite Index lost 1%. Google Class A shares fell 2.3% and Facebook slid 1.2% as technology shares had the largest drop among 10 main industries in the S&P 500.

The Institute for Supply Management’s factory index fell to a three-month low of 53.2 from the prior month’s 54.9, the Tempe, Arizona-based group’s report showed today. Fifty is the dividing line between growth and contraction. The median forecast of economists surveyed by Bloomberg called for a gain to 55.5.

Other factory reports from around the world were mixed. Manufacturing in the euro area grew at a slower pace amid weakness in France. Manufacturing in China expanded in May at the fastest pace in five months.

Economic data later this week include reports on U.S. factory orders and car sales, as well as the government’s monthly payrolls report on June 6.

Forecasts for a rebound in U.S. growth in the second quarter and stimulus from central banks in Japan and Europe, along with higher-than-estimated corporate earnings, helped send the value of global shares to a record $64 trillion in May.

Economic Growth

The S&P 500 ended the month at a record after shrugging off a report showing the U.S. economy contracted for the first time in three years during the first quarter. Federal Reserve policy makers said at their April meeting that the economy has strengthened after adverse weather took its toll. Central-bank stimulus has helped propel the S&P 500 higher by as much as 184% from its bear-market low in March 2009.

Investors will also be looking to Europe this week as Mario Draghi confronts the threat of deflation, preparing to unleash an array of measures to jolt the economy and ignite prices. From negative interest rates to conditional liquidity for banks, the European Central Bank president and his colleagues have signaled all options are up for discussion when they meet on June 5.

Of 50 economists surveyed by Bloomberg News, 44 expect the ECB to become the first major central bank to take interest rates into negative territory by cutting its deposit rate. All but 2 of 58 respondents said the benchmark rate would also be reduced.

Low Volume

Trading in S&P 500 companies was 22% below the 30- day average today. About 1.8 billion shares traded each day in S&P 500 companies last month, the fewest since 2008, according to data compiled by Bloomberg. When the gauge hit an all-time high on May 23, only about 20 of its 500 companies reached 52- week highs, the data show. That’s the lowest number in a year.

When volume and breadth wane even as stocks surge, it’s a warning sign that has preceded losses in the past, according to Sundial Capital Research Inc. in Blaine, Minnesota. Hayes Miller, who helps oversee $57 billion at Baring Asset Management Inc., says the skepticism shows investors distrust a rally built on Fed stimulus.

“Breadth is suggesting that the market is topping,” Miller, the Boston-based head of multi-asset allocation for Baring, said in a May 28 telephone interview. “This is not a good starting point for buying equities at this price. We all know that investors are induced into risk assets by central bank policies, which keep your safer options very unattractive.”

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