'Fear Trumps All Rationality': Stocks Slump to Lowest Since August as Dow Ends Down 391

U.S. stocks dropped, with the Standard & Poor’s 500 Index falling to its lowest level since Aug. 25, as the rout in oil persisted and data showing falling retail sales rekindled concern about the health of the economy. At one point, the Dow plunged more than 535 points.

The S&P 500 pared earlier losses that sent it 3.3 percent lower, while technology and energy stocks led losses today. Goldman Sachs Group Inc. fell 3.6 percent after agreeing to settle a U.S. probe into its handling of mortgage-backed securities, a move that will cut its fourth-quarter profit by about $1.5 billion. Citigroup Inc. and Wells Fargo & Co. lost at least 3.6 percent even after reporting quarterly earnings that topped projections. Wal-Mart Stores Inc. dropped 1.8 percent after saying it plans to close 269 stores.

The worst start to a year in U.S. equities on record has left them trading at the most attractive level versus bonds in a year based on one valuation measure. Dividend yields in the S&P 500 have climbed 30 basis points above the yield offered by 10-year Treasurys, a reversal from just last week when the payout from bonds was higher. The S&P 500’s multiple based on profits is also at a cheaper level. The gauge is trading at 16.8 times reported profits, a 8.6 percent discount to its average multiple over the last year.

The S&P 500 dropped 2.2 percent to 1,880.29 at 4 p.m. in New York, after earlier falling to the lowest level since April 2014. Volume on U.S. exchanges was 46 percent higher than the three-month average. The Dow Jones Industrial Average slid 391 points, or 2.4 percent, to 15,988.08, while the Nasdaq Composite index dropped to its lowest level since October 2014. U.S. equities markets are closed Monday for a federal holiday.

“The laser focus with the markets is on oil and weaker oil bleeds beyond the energy sector,” said Joe Quinlan, New York-based chief market strategist at U.S. Trust, Bank of America Private Wealth Management. Quinlan, who recommends buying beaten down stocks that have growth potential like in defense spending, water infrastructure and global health care, also said, “This is one of these market moments when fear trumps all rationality. We will have to work through this panic period to move forward.”

Oil plummeted to fresh new lows, hovering around $29 a barrel, and the Shanghai Composite Index entered a bear market. Concern over China’s slowdown and deepening crude losses have dominated investor sentiment in 2016, prompting a 8 percent plunge in the S&P 500. Losses pushed Tobias Levkovich, chief U.S. equity strategist at Citigroup, to trim his 2016 target on the S&P 500 yesterday. The measure posted its third straight weekly decline.

The Chicago Board Options Exchange Volatility Index jumped 13 percent to 27.02. The measure of market turbulence known as the VIX has surged 48 percent so far in 2016.

Corporate earnings may offer cues on the strength of the U.S. recovery, with seven S&P 500 companies posting results today. Analysts project earnings for firms on the gauge fell 6.7 percent in the fourth quarter, and downgrades to global profit growth haven’t been this bad in seven years.

Stock index futures extended declines earlier after reports showed retail sales decreased in December to cap the weakest year since 2009 and a Fed gauge of manufacturing in New York slumped. The 0.1 percent drop in retail sales matched the median forecast of economists surveyed by Bloomberg. The New York Fed’s Empire manufacturing index plunged to minus 19.37, lower than the minus 4 economists had forecast.

“The growth picture in the U.S. is getting cloudier, and the fact that the Fed tightened in a weak environment is certainly not helping,” said Krishna Memani, chief investment officer at Oppenheimer Funds Inc. in New York. “The data is clearly supporting how the markets are feeling at the moment.”

The Fed has stressed the pace of further rate increases will be gradual, but data-dependent. Traders are pricing in about a 30 percent chance of the central bank acting in March, while odds for an increase this month have stayed low since the December liftoff.

Intel Corp. dropped 9.1 percent after its quarterly sales forecast missed estimates.

BlackRock Inc. fell 4.3 percent after the world’s largest money manager reported fourth-quarter earnings that missed analysts’ estimates as rising expenses offset higher revenue.

Marathon Oil Corp. and Transocean Ltd. retreated 6.5 percent or more. All energy stocks in the S&P 500 except three declined today. Goldman Sachs said in a report that oil will turn into a new bull market before the year is out as the price rout shuts down production, putting the U.S. shale-oil boom into reverse in the second half of the year. As U.S. production slumps by 575,000 barrels a day, global oil markets will tip from surplus to deficit, the bank said in a report.