S&P 500 falls most since November amid concern over valuations

Bloomberg NewsJanuary 14, 2014 

NEW YORK -- U.S. stocks fell, sending the Standard & Poor's 500 Index to its biggest loss in two months, amid concern over valuations after benchmark indexes rallied to all-time highs in 2013.

Companies from Microsoft to Nike and Walt Disney dropped more than 2 percent, with all 10 main industries in the S&P 500 declining. Lululemon Athletica slumped 17 percent after the sportswear maker lowered its profit and sales forecast. Intercept Pharmaceuticals plunged 18 percent after the stock soared sixfold last week. Beam jumped 25 percent after Suntory said it will acquire the spirits maker in a $16 billion deal.

The S&P 500 fell 1.3 percent to 1,819.20, the lowest level since Dec. 20, at 4 p.m. in New York. Some 464 companies in the S&P 500 declined on Monday, the most since Aug. 27, data compiled by Bloomberg show. The Dow Jones Industrial Average lost 179.11 points, or 1.1 percent, to 16,257.94, for the biggest drop since September. About 7.2 billion shares changed hands on U.S. exchanges, the most since Dec. 20.

"Sentiment is extremely optimistic and that's a negative for stocks," Bruce Bittles, chief investment strategist at RW Baird, said by phone from Sarasota, Fla. His firm oversees $105 billion. "That means for the short term they're fully in

vested. Stocks have entered the new year overbought and over-believed and until we digest that, we're likely to stay in this range."

The S&P 500 has dropped 1.58 percent so far in 2014, the worst start to a year since 2009, according to data compiled by Bloomberg. The index ended last year at a record, having climbed 30 percent for its biggest annual rally since 1997.

Valuation for the S&P 500 is "lofty by almost any measure," Goldman Sachs analysts wrote in a note on Friday. Further price-to-earnings expansion will be difficult to achieve, according to the note.

The benchmark index trades at 15.4 times the estimated earnings of its members, more than the average multiple of 14.1 over the last five years, data compiled by Bloomberg show. The gauge ended 2013 at its highest valuation since the end of 2009.

"The way to think about the market is the level of earnings and the multiple which should be applied to that earnings growth," David Kostin, chief U.S. equity strategist at Goldman Sachs, said Monday on Bloomberg Television. "Those really are the fundamental drivers of the level of U.S. equity markets this year."

JPMorgan Chase, Bank of America, Goldman Sachs, and Citigroup are among 29 members of the S&P 500 to report quarterly results this week. Earnings for companies in the index probably climbed 4.9 percent on average in the fourth quarter, while sales increased 1.8 percent, according to analyst estimates compiled by Bloomberg.

Stocks extended declines Monday after Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economy is on "solid footing" and he would support continued cuts to stimulus.

Three rounds of monetary stimulus from the Fed have helped push the S&P 500 higher by 169 percent from a 12-year low in 2009. The Fed, which next meets Jan. 28-29, last month announced a reduction in its monthly bond-buying program, citing a recovery in the labor market.

The S&P 500 increased on Friday after a report from the Labor Department showed employment rose in December at the slowest pace in almost three years. The data ended months of improving job growth that had signaled the world's largest economy was picking up.

"It sounds as if the Fed is staying on its course of tapering," John Carey, a fund manager at Boston-based Pioneer Investment Management, said in a telephone interview. His firm manages about $220 billion worldwide. "Whatever mixed signals could have come from the jobs numbers, they're looking at the overall picture."

The Chicago Board Options Exchange Volatility Index, which measures expected swings on the S&P 500 using options prices, rose 9.4 percent, the most in a month, to 13.28. The gauge fell 12 percent last week to its lowest level since Aug. 5.

The Morgan Stanley Cyclical Index and the Dow Jones Transportation Average each fell 1.4 percent. Microsoft decreased 2.9 percent to $34.98, while Disney tumbled 2.8 percent to $73.27 for the largest declines in the Dow industrial average. Nike fell 2.3 percent to $75.18 and Exxon Mobil slid 2 percent to $98.55.

The KBW Bank Index slumped 1.3 percent as Bank of America dropped 2 percent, the most since October, to $16.43 and Citigroup slipped 1.8 percent to $53.72. Homebuilders in the S&P erased 2.5 percent as PulteGroup lost 3.8 percent to $19.40 and D.R. Horton decreased 2.7 percent to $21.55.

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