The Dow and S&P 500 commenced the day’s trading session in the red, as investors locked in profits for fear the rally had gone too far.
There seems to be a growing consensus that we have come up too far too fast; Charles Knott, of Knott Capital Management, today told Bloomberg news that he thinks ‘there’s neither the willpower nor the means to fully finance that type of V shape recovery,’ while David Tice of Federated Investors believes that US stocks are ‘dramatically overpriced’.
‘I’d love for prosperity to return, unfortunately I think you need to be realistic and it takes time to work off these excesses,’ Tice told Bloomberg Television today.
By 3.30pm (London time), the Dow Jones Industrial Average was knocked 120.54 points (-1.3%) lower to 9277.65, while the broader S&P 500 declined 14.06 points (-1.39%) to 998.67. The technology-based Nasdaq index, meanwhile, fell 25.13 points (-1.5%) to 1603.52.
Investors seemed to be in a hurry to offload stocks this afternoon, despite the release of an official report showing better-than-expected US industrial production data. The report indicated that industrial output climbed 0.5% in July, better than Bloomberg’s expectations for a 0.4% rise and the prior month’s 0.4% decline.
The data continues to show that the government’s various stimulus programmes are, in fact, working. As a matter of fact, the better-than-expected reading was attributed to the success of the ‘cash-for-clunkers’ incentive programme, which helped ignite demand for automobiles. Mid-year retooling at automakers is also said to have contributed to the increase in industrial output.
‘Automakers are ramping up production to bring inventories back into balance’ after shutdowns and a campaign to slash stockpiles, said Mark Vitner of Wells Fargo Securities. ‘Auto production has lifted some other industries too. It’s going to offset the weakness in other areas. [1]
The report also showed US capacity utilisation rising to 68.5% in July from a revised 68.1% the month before.
But not all data was positive, which only exacerbated market sentiment. A separate report revealed that the cost of living in the United States fell at its fastest annual pace since 1950 – the Consumer Price Index tumbled 2.1% from a year ago in July after remaining unchanged over the month.
In addition, the Reuters Michigan Consumer Sentiment index unexpectedly fell to a reading of 63.2 in August from 66 in July, as consumers grew more concerned about the difficult labour market conditions.
Banks were among the market’s casualties today, with Citigroup down 3.2% to $3.93, despite positive comments from analysts at Bank of America-Merrill Lynch, which recommended buying the bank’s shares on the view that it will survive the financial crisis. They also increased their price target on Citigroup from $2.50 to $5.75 a share. Citigroup’s share price was down by 3.2% to $3.93, nevertheless. [2]
In the meantime, JPMorgan Chase fell 1.9% to $16.68, Goldman Sachs declined nearly 2% to $161.26 and Bank of America edged 1.9% lower to $16.68.
JC Penney was among the biggest fallers today, however, down 5% to $31.67, despite reporting a narrower-than-expected quarterly loss. The company raised its earnings guidance for the year, yet analysts were disappointed with its forecasts as they had believed they would be at the upper end of expectations.
[1] Source: Bloomberg News (14 August 2009)
[2] Source: Bank of America Merrill Lynch (14 August 2009)
By Anthony Grech, Research Analyst, IG Index.
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