U.S. stocks fell sharply Friday, with the major indexes headed for their worst single-day hit since June, as earnings from heavy hitters, particularly from the tech sector, weighed. Some household names disappointed on revenue, earnings or guidance. About 80 companies reporting this week: financials that better and technology did worse.
Since this is the worst day we’ve had in months, it reminds us that we haven’t had much volatility or downward pressure since the bottom in June.
The Nasdaq Composite declined 66.45 points, or 2.2%, to 3,006.47, with Friday’s slide pushing the index into negative turf for the week, lately down 1.2% since last Friday’s finish. Weighing on the Nasdaq, shares of Apple Inc. dropped 3.4%.
Next week about 140 S&P 500 /quotes/zigman/3870025 SPX -1.66% companies are scheduled to report, with the coming earnings to include companies from a broader range of sectors, including consumer, energy and industrials. If those sectors follow in technology’s wake, there would be more reason for concern, Hogan said.
Retaining a weekly rise of 0.4%, the S&P 500 index dropped 23.02 points, or 1.6%, to 1,434.32, with consumer discretionary taking the biggest hit of its 10 major industry groups. Meanwhile, the Dow Jones Industrial Average slumped 193.11 points, or 1.4%, to 13,355.83, shaving its gain for the week so far to 0.2%.
McDonald’s Corp. paced blue-chip losses that included all 30 components. The fast-food chain’s shares sank 4.3% after it missed consensus estimates for the third quarter.
“The earnings season is not great right now, but the fundamentals haven’t changed; the U.S. economy is still improving, and it hasn’t gotten worse in Asia or Europe,” said David Kelly, chief market strategist at J.P. Morgan Funds. After a strong run, “the market is taking a pause,” Kelly said.
Also weighing on the Dow, Microsoft Corp. fell 3.2% after the software maker reported earnings beneath Wall Street’s expectations, and General Electric Co. retreated 3.6% after its third-quarter revenue came in short of forecasts. Off the Dow, Honeywell International Inc.’s hares rose 1.7% after the diversified manufacturer cut its 2012 sales forecast but reported quarterly income that beat forecasts.
For every stock rising, nearly six fell on the New York Stock Exchange, where 632 million shares traded as of 3:40 p.m. Eastern. Composite volume neared 3.2 billion.
Oil and gold prices also fell, with crude futures /quotes/zigman/2203159 CLX2 -2.22% off $2.05 at $90.05 a barrel and gold futures /quotes/zigman/699338 GCZ2 -1.26% losing $20.70 to $1,724 an ounce.
The dollar gained against other global currencies, including the euro, while Treasury yields fell, with the benchmark 10-year note used in figuring the rate of home mortgages and other consumer loans down to 1.770%
A trade group reported Friday that sales of existing homes declined 1.7% in September from a 7.8% rise the prior month. The data from the National Association of Realtors was in line with expectations, but as with Thursday, economic reports and events in Europe both took a back seat to corporate results.
“Home sales did fall, but the supply of homes also fell, and if you look at the inventory of new and existing homes combined, there are 2.4 million total homes for sale in the U.S., the lowest since July 2002,” said Kelly.
Homes for sale “peaked at 4.4 million in July of 2007, so we’re 2 million lower than just after the peak of the housing bubble,” said Kelly, who noted the lower supply should drive prices up, increase housing starts as well as household net worth, and lead to more confidence and bank lending.
The heads of the 17-nation euro zone on Friday agreed to continue their pursuit of a banking supervisor. Read: Investor fears of euro-zone catastrophe fading.
“The fact they for the most part have continued to give us moderately positive guidance has allowed us to focus attention on back here. Unless we have Spain or France saying ‘hey, we’re not going to play,’ then it’s a concern,” said Cobb, of the ongoing efforts to keep the borrowing costs of both nations under control in order to keep each in the euro zone.
Friday’s sharp retreat comes 25 years after the worst single-session stock drop in history, with the Dow losing 23% of its value on Oct. 19, 1987. Read: 10 lessons from the market crash of 1987.
Stocks on Thursday fell for the first session this week after Google Inc.’s /quotes/zigman/93888/quotes/nls/goog GOOG
third-quarter earnings came in below expectations
More Stimulus From Overseas Helping Support Equities
The domestic equity markets are gaining ground in afternoon action, buoyed by the announcement overnight that Japan will join recent moves out of the US and Europe and provide further economic stimulus through an increase of its asset purchase program. Also, stronger-than-expected US existing home sales and building permits are aiding sentiment, overshadowing a dip in mortgage applications and a smaller-than-anticipated level of housing starts.
Treasuries are moving higher, while gold and the US dollar are lower. Meanwhile, crude oil prices are moving sharply lower to apply pressure to energy stocks after a much larger-than-expected increase in oil inventories, along with growing speculation that Saudi Arabia may be taking measures to lower oil prices.
In US equity news, General Mills Inc and AutoZone Inc posted stronger-than-expected profits, while Dow member Microsoft Corp increased its quarterly dividend by 15%. Overseas, the Japanese stimulus measures helped overshadow Spanish bailout uncertainty to support an advance for European stocks.
Company and Earnings News
General Mills Inc. (GIS $40) reported fiscal 1Q earnings ex-items of $0.66 per share, above the $0.62 consensus estimate of analysts surveyed by Reuters, with revenues increasing 5% year-over-year (y/y) to $4.1 billion, roughly inline with the Street’s expectations. The company said its quarterly results saw sequential improvement in its volume and gross margin trends from 4Q. The company reaffirmed its full-year EPS guidance, noting that in its core US market, it is seeing slow improvement in price and volume trends across its retail food categories, while its established international businesses are showing good momentum. GIS is trading higher.
AutoZone Inc. (AZO $375) posted fiscal 4Q profits of $8.46 per share, north of the $8.40 that the Street had anticipated, as revenues increased 4.6% y/y to $2.8 billion, matching analysts’ expectations. The auto parts retailer said its 4Q same-store sales—sales at stores open at least a year—rose 2.1% y/y, but the figure came in below the company’s expectations. AZO is moving to the upside.
Dow member Microsoft Corp. (MSFT $31) announced that its Board of Directors has declared a 15% increase in the company’s quarterly dividend to $0.23 per share. The dividend will be payable December 13, to shareholders of record on November 15. MSFT is modestly lower.
Existing Home Sales and Building Permits Top Forecast, While Housing Starts Miss
Housing starts for August came in below expectations, rising 2.3% month-over-month to an annual pace of 750,000 units, after July’s figure was revised downward to a 733,000 rate, from an initially reported pace of 746,000. Economists surveyed by Bloomberg called for starts to come in at 767,000 units. However, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, came in above forecasts, declining 1.0% m/m in August to an annual rate of 803,000, after July’s slight downward revision to a 811,000 rate, and compared to the annual pace of 796,000 units economists’ projected. The results were characterized by a slowdown in multi-family after trending higher recently. Multi-family starts fell 4.9% m/m and permits declined 3.0% m/m, while single-family starts rose 5.5% m/m, the most in over two years, and single-family permits rose 0.2% m/m.
Existing-home sales rose to a two-year high, gaining 7.8% m/m in August to an annual rate of 4.82 million units and beating the 4.56 million unit estimate, while July’s figure was unrevised at a 4.47 million unit pace. The median existing-home price rose 9.5% from a year ago to $187,400, and fell 0.2% m/m.
The supply of homes available for sale rose 2.9% m/m but fell 18.2% y/y to 2.47 million units, equating to 6.1 months of supply at the current sales pace. Single-family home sales rose 8.0%% m/m, while multi-family gained 6.1% m/m. Sales of existing homes reflect closings from contracts entered one-to-two months earlier.
Lawrence Yun, economist at the National Association of Realtors (NAR) that releases the existing home report, “The strengthening housing market is occurring even with difficult mortgage qualifying conditions, which is testament to the sizable stored-up housing demand that accumulated in the past five years.” There are signs the market is becoming healthier, with fewer distressed sales, falling to 22% of sales from 31% a year ago, which is also helping prices, reducing sales at the low end of the market and boosting the median sales price. Sales of homes priced under $100,000 fell 5% y/y.
Elsewhere, the MBA Mortgage Application Index ticked lower by 0.2% last week, after rising 11.1% in the previous week. The decline came as a 0.8% rise in the Refinance Index was more than offset by a 3.8% decrease in the Purchase Index. The mixed mortgage activity came as the average 30-year mortgage rate declined 3 basis points to 3.72%.
In other economic news, crude oil prices extended solid losses after the US Department of Energy (DoE) reported that domestic crude oil inventories jumped by 8.5 million barrels last week, well above the 1 million barrel increase that economists had expected. Crude oil prices were already under some pressure amid speculation that Saudi Arabia is taking action to lower oil prices.
Treasuries are mostly higher in afternoon action, with the yield on the 2-year note unchanged at 0.25%, while the yield on the 10-year note is declining 2 bps to 1.79%, and the 30-year bond rate is decreasing 3 bps to 2.98%.
Japanese Stimulus Overshadows Continued Spanish Bailout Uncertainty
The European equity markets finished higher, supported by the announcement from the Bank of Japan that it will boost its asset purchase program, adding to the recent moves from the US Federal Reserve and the European Central Bank. The announcement from the BoJ overshadowed festering uncertainty regarding whether Spain will conform to the ECB’s requirement for the central bank to deploy its recently announced bond-buying program by asking for aid from the eurozone’s bailout facilities.
The ECB reentry into the sovereign debt markets would help bring down Spain’s elevated borrowing costs, but the ECB’s plan does come with strict fiscal conditionality that may be keeping the contagion engulfed nation from asking for aid.
Meanwhile, on the equity front in the region, shares of Porsche (POAHY $6) moved nicely higher after a German court dismissed investor lawsuits against the sportscar maker. Elsewhere, Inditex SA (POAHY $6) moved nicely higher after a German court dismissed investor lawsuits against the sportscar maker. Elsewhere,Read More
Equities Remain on Upward Path
Resurfacing hopes that the Federal Reserve is nearing the deployment of further stimulus measures on the heels of comments from a Fed official are helping US stocks advance for the third-straight session.