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U.S. stocks tumbled, sending the Standard & Poor’s 500 Index to its biggest four-week loss since March 2009, as concern the global economy is stalling overshadowed the cheapest valuations in 2 1/2 years.
Hewlett-Packard Co. (HPQ) plunged 27 percent this week, the most since the October 1987 market crash, after a strategy shift undermined confidence in its managers. Technology, industrial and raw-material companies in the S&P 500 dropped at least 6.9 percent, the most among 10 groups. Caterpillar Inc. (CAT) and Alcoa Inc. (AA) retreated more than 8.4 percent after some of the world’s biggest banks — Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc. — slashed economic growth forecasts.
The S&P 500 lost 4.7 percent to 1,123.53. It has sunk 16 percent since July 22 as about $3 trillion was erased from the value of U.S. equities, according to data compiled by Bloomberg. The Dow Jones Industrial Average fell 451.37 points, or 4 percent, to 10,817.65 this week, extending its four-week decline to 1,863.51 points.
“We’re in a little bit of a tug of war,” David Joy, the Boston-based chief market strategist at Ameriprise Financial Inc., said in a telephone interview. His firm oversees $693 billion. “On the one hand, there’s the real concern about what’s going on in Europe, about the pressure on the banking system and weakness in the global economy. On the other, an opposing force seems to be an interest in buying at attractive equity valuations.”
Cheapest Since 2009
The S&P 500 has fallen 18 percent from an almost three-year high on April 29 amid concern about Europe’s government debt crisis and a global economic slowdown. The decline through Aug. 8 drove the index to a valuation of 12.2 times reported earnings, the lowest level since March 2009. Its price-earnings ratio is now 12.3, compared with the average of 16.4 since 1954, according to data compiled by Bloomberg.
This week’s loss included the S&P 500’s 4.5 percent retreat on Aug. 18 amid speculation that European banks lack sufficient capital. Lars Frisell, the chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze. The market also declined after U.S. jobless claims rose, Philadelphia-area manufacturing shrank by the most since 2009 and hopes for more stimulus from the Federal Reserve receded.
The Morgan Stanley Cyclical Index of companies most-tied to economic growth plunged 10 percent this week, extending its loss since July 22 to 26 percent and falling to the lowest level since Aug. 26, 2010. Morgan Stanley economists cut forecasts for global growth this year and said the U.S. and Europe are “dangerously close to recession.”
JPMorgan, Citigroup
JPMorgan said the U.S. may expand less than previously projected in the next two quarters as consumer sentiment drops and the housing market fails to gain momentum. Citigroup also cut estimates for the U.S.
“We separate the economic picture from the investment picture,” Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4 billion in Raleigh, North Carolina, said in a phone interview. “If the economy is lackluster and stagnant, that does not imply that the stock market has to continue to decline. With valuations where they are, we find the market to be attractive. Companies are generally in good shape, and earnings growth can continue to be quite strong.”
Profit at S&P 500 companies is forecast to rise 17 percent to $99.05 a share in 2011 and 14 percent to $112.81 in 2012, according to average analyst estimates compiled by Bloomberg.
Moving Together
Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market’s biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 on Aug. 18, using 60 days of data, according to MF Global.
High correlation “is usually the case in a bear market, when investors are liquidating equities as an asset class,” Craig Peskin, co-head of technical analysis at the New York- based firm, wrote in an e-mail on Aug. 18. “In a bull market, when investors are differentiating, we see low or falling correlation.”
Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.
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