U.S. equities drop to two-month lows
Bond market anxiety has caught the notice of equity investors after Third Avenue Management froze redemptions at a high-yield mutual fund last week, and Lucidus Capital Partners liquidated its entire high-yield portfolio. The SPDR Barclays High Yield Bond ETF, a proxy for the market, slipped 0.8 percent after falling 2 per cent on Friday, its biggest one-day drop in four years. Crude oil on Monday fell for a seventh day.
The Standard & Poor’s 500 Index fell 0.4 per cent to 2,003.69 at 10:32 a.m. in New York, after sliding 1.9 per cent Friday to cap the gauge’s worst week since August. The Dow Jones Industrial Average lost 53.98 points, or 0.3 per cent, to 17,211.23. The Nasdaq Composite Index declined 0.5 per cent.
“There are a lot of fireworks here coming down to the wire with the Fed,” said Jim Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management Inc. “Oil seems to be the big story today unless you have another stress announcement. Another announcement of financial stress around the commodity collapse would certainly accelerate this move to the downside.”
Stocks worldwide have sputtered this month, as the prospects for a Fed rate increase as soon as Dec. 16 and a drop in oil sparked a selloff in riskier assets. The deepening rout on commodities markets amplified concern that struggling resource producers won’t be able to stay solvent while weakness in high-yield credit markets has sparked fear of contagion.
The 3.7 per cent decline for the S&P 500 is so far proving an exception to a historical trend of a strong December performance, and would mark the worst end to a year since 2002. The benchmark is 7.2 per cent above an August low, after rebounding as much as 13 per cent, from a summer selloff.
The S&P 500 slid to a two-month low on Friday, rounding off its first weekly drop in four. Asset managers extended declines today after a rout Friday following Third Avenue’s move to freeze redemptions in its $789 million Focused Credit Fund. Franklin Templeton Funds parent Franklin Resources lost 4.1 per cent, while Legg Mason Inc. declined 2.7 per cent.
Apple Inc. dropped 2.1 per cent, weighing on the technology group after Morgan Stanley cut its 2016 iPhone sales outlook while JPMorgan Chase & Co. noted signs of weakness in the company’s supply chain.
The S&P 500’s recent drop has dragged it closer to levels that chart analysts call oversold. Its relative strength index is the lowest since September.
Next year isn’t looking too bright for U.S. equity investors, with valuations likely to contract after the Fed’s rate increase. Past hikes have almost always put a ceiling on S&P 500 price-earnings ratios, and this would come at a time when profits are already in decline. Such a combination hasn’t occurred in five decades.
Traders are pricing in a 76 per cent chance that the Fed’s meeting will confirm Chair Janet Yellen’s belief that the U.S. economy is strong enough to withstand the first increase in borrowing costs since 2006. Investors have wavered between optimism about the U.S. and concern that a slowdown in China will damp global growth prospects.
Investors have few economic cues to go on before the Fed’s announcement, with reports on housing starts and industrial production scheduled for the day of the decision, while a release on jobs comes the following day. Although data have been improving lately, it’s still missing economists’ projections, according to Bloomberg’s economic surprise index.
FedEx Corp., Oracle Corp., General Mills Inc. and homebuilder Lennar Corp. are due to report quarterly results this week. With a little more than two weeks left in the fourth quarter, analysts forecast a 5.8 per cent drop in S&P 500 companies’ profits for the period, after a 3.8 per cent decline last quarter.
The Chicago Board Options Exchange Volatility Index rose 7.3 per cent Monday to 26.18, the highest since Sept. 29. The measure of market turbulence known as the VIX surged 65 per cent last week, the most since a summer market swoon led the gauge to a record monthly jump in August.