Stocks Sink After S&P Revises US Outlook
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Special to CNBC.com
Stocks closed down more than 1 percent, although well off the lows of the session, in the wake of news that Standard & Poor's revised its outlook on the long-term sovereign debt of the United States to "negative."
The Dow Jones Industrial Average fell 140.24 points, or 1.14 percent, to close at 12,201.59, after ending last week slightly lower. The blue-chip index fell 247 points at one point during the session.
Most Dow components sank, led by Bank of America [BAC
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], Caterpillar [CAT
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], and Alcoa [AA
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]. Boeing [BA
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] was the only stock on the blue-chip index to gain.
The S&P 500 fell 14.54 points, or 1.1 percent, to close at 1,305.14, while the Nasdaq fell 29.27 points, or 1.06 percent, to close at 2,735.38.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose about 11 percent to nearly 17, after trading well above 18 earlier in the session. The VIX had hit nearly four-year lows last week.
All key S&P 500 sectors fell, led by energy and financials.
It may be wrong to read too much into the market reaction to S&P's decision to revise the outlook for U.S. long-term debt as it came during a week marked by both the Passover and Easter holidays. As a result, many market participants are away, leaving trading desks thinly staffed.
Volume on the consolidated tape of the New York Stock Exchange was 4.4 billion shares, while 1 billion changed hands on the NYSE floor.
Given the amount of high frequency trading that dominates the market, "were there that many sellers," asks Joe Greco of Meridian Equity Partners. "No," he answered. But there also "weren’t many buyers out there to support the market," Greco said.
During a fully staffed session, the market could have fallen more, he said.
But, S&P's message, that U.S. finances are in dire shape, is not news to many investors and traders. Greco noted that Pimco, the world's largest bond fund, stepped away from US government debt back in March.
"Savvy money managers have already positioned themselves for potential negative ratings news, or negative ratings period," Greco said.
The downdraft in the market, and the spike in volatility, are not surprising given S&P's revision of its outlook for U.S. debt, and the fact a number of key earnings reports from financial and tech companies, among others, are due out this week, said J.J. Kinahan, chief derivatives strategist at TD Ameritrade.
Also, he noted, while the market has fallen, the S&P 500 is still trading above 1,275, the low end of a range that the market has sustained for awhile.
"There's no reason to hit the panic button yet," Kinahan said, adding, "It's natural that the volatility would increase."
Treasurys surprisingly ended the session higher despite S&P's rating action.
Meanwhile, oil prices dropped after a lack of buyers for crude prompted Saudia Arabia to cut its output. London Brent crude [LCOCV1
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] fell 1.5 percent to $121.61 a barrel, while U.S. light crude [CLCV1
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] fell 2.3 percent to close at $107.12.
Gold prices surged to a new record, closing at $1,493.30, after news of the revision in the outlook for U.S. debt. Silver closed at a new 31-year-old high of $42.96.
The dollar [.DXY
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], however, was up slightly in part because of pressure on the euro amid concerns that Greece will need to restructure its debt and continuing uncertainty over Portugal's financial health.
In earnings news Monday, Citigroup [C
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] posted a profit of 10 cents per share, a penny ahead of estimates, but net income fell, and the bank said it continues to struggle in terms of growth.
Elsewhere in earnings, Eli Lilly [LLY
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] reported profit of 95 cents a share, beating analyst estimates and sending shares of the Illinois drugmaker up. And Halliburton [HAL
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] also reported sharply higher earnings on increased activity in North American oil fields that offset Middle East unrest.
Texas Instruments [TXN
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] will report earnings after the market closes, while Goldman Sachs [GS
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] and Johnson & Johnson release results before the market opens on Tuesday.
Goldman was also in the news Monday for repaying Warren Buffet the $5.5 billion the billionaire investor made in the investment bank at the height of the financial crisis.
Healthcare stocks were in the spotlight after Swiss medical device maker Synthes [SYMX
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] confirmed it is in merger talks with Johnson & Johnson [JNJ
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] in a deal which could be worth $20 billion.
Gap [GPS
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] fell sharply after news Goldman Sachs downgraded the retailer to "sell" from "neutral," saying their large size represents a "structural hurdle." Bank of America Merrill Lynch downgraded Gap to "neutral" from "buy."
Boeing [BA
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] traded flat to slightly higher after news it received approvals from regulators in several countries to begin training commercial pilots for its 787 Dreamliner.
Molycorp [MCP
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] gained after news the rare earth producer bought Santoku America of Arizona, which makes rare earth metals and alloys.
S&P's news rocked the market in the half hour before stocks opened for trading, sending futures, which were already weak, sharply lower. S&P said it was affirming the U.S.'s triple-A rating, but the rating agency put the U.S.'s long-term debt on "negative" watch from "stable."
The revised outlook reflects the "very large budget deficits and rising government indebtedness" of the U.S. relative to its triple-A peers, S&P said in a press release. "The path to addressing these is not clear to us," the rating agency said.
In response, Assistant Secretary for Financial Markets Mary Miller of the U.S. Department of the Treasury noted that S&P emphasized "the importance of timely bipartisan cooperation and action on fiscal reform."
And, Miller said in a press release, Moody’s, a second rating agency, said that: ''we view the changed parameters of the debate, with broadly similar goals as to government debt levels, as a turning point that is positive for the long-term fiscal position of the U.S. federal government."
In economic news, the National Association of Home Builders said its index of homebuilder sentiment fell to 16 in April from 17 in March as homebuilders reported the spring season was off to a slow start.
Elsewhere, China boosted its requirements for bank reserves to 20 percent to stem inflation.
In Europe, Greece tried to fend off accusations that it would need to restructure its debts but failed to convince investors.
On Tap Next Week:
MONDAY: Taxes due; earnings from Texas Instruments after-the-bell.
TUESDAY: Housing starts, Fifth Third shareholders meeting, Moody's shareholders meeting, BlackBerry Tablet launches; earnings from Goldman Sachs and Johnson & Johnson before-the-bell, and IBM, Intel, Yahoo after-the-bell.
WEDNESDAY: Weekly mortgage applications, existing home sales, oil inventories; earnings from Abbott Labs, AT&T, United Tech and Wells Fargo before-the-bell and AmEx, Amgen, Apple, Qualcomm, Yum Brands after-the-bell.
THURSDAY: Weekly jobless claims, Philadelphia Fed survey, leading indicators, money supply, Citigroup shareholders meeting; earnings from DuPont, GE, McDonald's, Morgan Stanley, Travelers and Verizon before-the-bell and Advanced Micro and Capital One after-the-bell.
FRIDAY: Good Friday—All markets closed, banks open.
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