(Bloomberg News) Investors who warned stock losses in May would mimic last year's decline in the Standard & Poor's 500 Index from the highest level since 2008 were wrong. The losses are three times worse.
About $1 trillion has been erased from American equity values this month after speculation Greece will leave the euro region reversed the biggest first-quarter rally since 1998, according to data compiled by Bloomberg. That compares with $345 billion in the 13 days after April 29, 2011, when the S&P 500 reached its highest level in three years.
Faltering stocks, reports showing weaker economic growth and concern about the economic health of countries from Spain to Italy is reminding investors of 2011, one of the most volatile years on record as the S&P 500 dropped as much as 19 percent. Investors bracing for a retreat pulled $18 billion from U.S. equity mutual funds in April, the most since at least 1984, according to the Investment Company Institute.
"We are looking at bigger risks," Peter Sorrentino, a fund manager who helps oversee $14.7 billion at Huntington Asset Advisors in Cincinnati, said in a telephone interview yesterday. "Unlike last year, where we had some time to kick the can down the road and there was room for hope, this year is worse because it looks like Europe is hitting the wall and the can's not gonna go any further."
The S&P 500 fell for the fifth time in a row yesterday, sending the benchmark gauge for U.S. shares to the lowest closing level since January, amid disappointing economic data and concern about Europe's debt crisis. After the market closed, Moody's Investors Service confirmed investor speculation as it cut credit ratings for 16 Spanish banks, citing economic weakness and the government's budget strain.Eight Days
Nine out of 10 groups in the S&P 500 declined yesterday as an index of leading indicators slid and manufacturing in the Philadelphia region unexpectedly shrank. Caterpillar Inc. and JPMorgan Chase & Co. dropped at least 4.3 percent. The Nasdaq-100 Index fell for an eighth day, the longest slump since 2010, as Apple Inc. sank 2.9 percent.
The S&P 500 has plunged 6.7 percent since the end of April, compared with its 2.5 percent decrease between last year's April 29 high and May 17. This year's decline followed a 12 percent rally in the first quarter. Mining and chemical companies have led the tumble, dropping 10 percent, followed by banks and brokerage firms with a 9.9 percent decline and energy producers, down 9.3 percent.Industry Rotation
Last year's selloff was led by commodities companies and marked the beginning of a rotation into companies less dependent on economic growth that lasted the rest of the year. Over the same period in May 2011, utilities climbed 2.8 percent, health- care companies added 2.4 percent and makers of household goods increased 2.1 percent, data compiled by Bloomberg show.
Confidence in stocks has waned since French Socialist Francois Hollande was elected president and Greek voters picked anti-bailout parties on May 6, according to Philip Orlando, chief equity strategist at Federated Investors Inc., which oversees about $370 billion.
The investor response is "exclusively a function" of these elections, which are a "worst case scenario," Orlando said in a telephone interview yesterday. "Those who understand finance and the markets recognize that the Greeks are signing their death certificate."
Investors are locking in profits after the stock market's rally earlier this year and are putting their money into Treasury inflation-protected securities, precious metals and defensive consumer names as they anticipate a third round of quantitative easing by the Federal Reserve, according to Sorrentino.Pay a Premium
The U.S. sold $13 billion of 10-year inflation-indexed notes yesterday at a record negative yield with investors willing to pay a premium to guard against the threats of rising consumer prices and Europe's worsening debt crisis. Gold jumped the most since October after tumbling 3.7 percent in the past four sessions, while silver futures for July delivery posted their biggest advance since April 12.
The Fed signaled May 16 that further monetary easing remains an option to protect the U.S. economy from the danger that lawmakers will fail to reach agreement on the budget or Europe's debt woes worsen. Several members of the Federal Open Market Committee said new actions could be necessary if the economy loses momentum or "downside risks to the forecast became great enough," according to minutes of the Federal Open Market Committee's April meeting.Operation Twist
Investors are speculating the central bank may provide additional stimulus after a $400 billion program called Operation Twist, in which the Federal Reserve is replacing short-term debt in its holdings with longer-term securities, ends, Sorrentino said. Pimco's Co-Chief Investment Officer Bill Gross and Jan Hatzius, the chief economist at Goldman Sachs, said this month that investors should prepare for more bond purchases by the Fed to combat a slowing economy.
"If you thought that was coming, why not get out now, wait for it to bottom," Sorrentino said, referring to QE3. "It's not so much that the U.S. needs it but it's to keep what's going on in Europe from cascading here. It's like putting up a firewall."
Economic data is trailing estimates by the most in seven months. The Citigroup Economic Surprise Index for the U.S., which measures how much data is missing or beating the median estimates in Bloomberg surveys, slipped to minus 25.1 yesterday and was minus 25.6 on May 10, the lowest since Sept. 30.
"It's tough to have confidence in the equity markets with all that's going on around the world," Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., said in an e-mail. His firm oversees about $80 billion. "I don't see us going back to the lows of last year, but it's going to be a struggle to move higher."