(Bloomberg News) U.S. stocks fell, after the longest rally since September in the Standard & Poor's 500 Index, as home prices dropped more than forecast and concern about Europe's debt crisis grew as Italian bonds declined.
The S&P 500 lost 0.2 percent to 1,263.19 at 9:31 a.m. New York time. The benchmark gauge for U.S. equities climbed 5 percent over the previous four days.
"There's still plenty to worry about," James Paulsen, who helps oversee about $333 billion as chief investment strategist at Minneapolis-based Wells Capital Management, said in a telephone interview. "The 10-year Italian sovereign is back above 7 percent. That's concerning. As the European economic situation gets worse, the concern is how much fallout will that have into many global economies, in particular the United States."
The S&P 500 erased its loss for 2011 last week as data on consumer confidence and housing starts added to expectations the U.S. can weather Europe's debt woes. The index had fallen as much as 19 percent from this year's high in April on concern Europe was struggling to tame its crisis. The gauge was up 0.6 percent in 2011 through Dec. 23 as utility shares and consumer companies that sell necessities led the gains.
Italian government bonds fell, pushing the yield on benchmark 10-year securities to more than 7 percent, as the nation prepares to auction as much as 20 billion euros ($26.2 billion) of debt in the next two days. Residential real estate prices dropped more than forecast in the year ended October, showing a broad-based decline that indicates the housing market continues to be weighed down by foreclosures.
Stock swings that reached twice the five-decade average left the S&P 500 with the smallest price change in 41 years and utilities, soapmakers and health-care providers at the highest valuations since 2008.
The S&P 500 rose 3.7 percent last week, sending the measure to a gain of 0.6 percent for the year. The last time it moved less on an annual basis was in 1970, when it fell 0.1 percent. Within the gauge, companies least tied to economic growth, such as Biogen Idec Inc. and Hershey Co., increased an average 15.7 percent including dividends, returning 8.2 times more than the index after adjusting for historical price swings. That's the biggest gap since at least 1989.
Bears say that the 2011 performance means there are even fewer stocks worth buying after valuations for defensive shares increased 7.4 percent. With the U.S. showing more signs of growth, bulls say the divergence between those shares and companies most dependent on the economy preceded market-wide rallies in 2001, 2007 and 2009.
"The combination of a very crowded trade and a market that's very cheap with a lot of doubters suggests to me the place to put funds is in the market overall," Andrew Slimmon, the Chicago-based managing director of global investment solutions at Morgan Stanley Smith Barney LLC, which has $1.7 trillion in client assets, said in a phone interview Dec. 19.