U.S. Stocks Decline Amid Skepticism About Fed Bond Purchases

By Cristina Alesci

March 19 (Bloomberg) -- U.S. stocks retreated, paring a global rally, as financial shares fell for the first time in three days on growing skepticism the Federal Reserve’s plan to buy bonds will revive the economy.

JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. declined at least 5.7 percent. Prudential Financial Inc., the second-biggest U.S. life insurer, tumbled 25 percent after its senior debt rating was downgraded by Moody’s Investors Service because of investment losses. Oracle Corp. led an advance in technology shares after its earnings topped estimates and the company said it will start paying a dividend.

The Standard & Poor’s 500 Index dropped 1.3 percent to 784.04. The Dow Jones Industrial Average lost 85.78 points, or 1.2 percent, to 7,400.80. The Russell 2000 Index of small companies slumped 1.1 percent to 413.26. The MSCI World Index of 23 developed markets added 1.5 percent to 800.98, giving it an eight-day winning streak that’s the longest since 2006.

“With one hand the government is issuing debt, and with the other it’s repurchasing it using paper that it is printing,” said Lawrence Creatura, a Rochester, New York-based money manager at Federated Investors Inc., which oversees $407 billion. “This is a shell game that’s not going to be overlooked by global investors.”

A slump in financials overtook a rally in materials and energy producers that had helped drive a 1.1 percent gain in the S&P 500 one minute after trading started in New York. The decline halted the S&P 500’s rebound from the 12-year low reached on March 9, paring the gain to 16 percent.

54% Surge

Financial shares rose in seven of the previous eight days, advancing 54 percent from March 6 through yesterday. The gains came as Citigroup Inc., Bank of America Corp. and JPMorgan said they were profitable in January and February, spurring speculation the worst of the financial crisis is over.

The gain through yesterday pushed the S&P 500 Financials Index’s 14-day relative strength index, a measure of whether stocks have risen too far too fast, to its highest since October 2007.

“Everyone’s holding their breath and asking whether this rally has legs to it or not,” said Keith Wirtz, who helps oversee $20 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. “A lot of money is still on the sidelines.”

JPMorgan, the biggest U.S. bank by market value, fell 8 percent to $24.95. Morgan Stanley declined 13 percent to $21.04 and Goldman Sachs slid 5.7 percent to $99.30.

Insurers Fall

Along with Prudential, insurer Lincoln National Corp. was among the top five decliners in the S&P 500. Lincoln National lost 15 percent to $8.04. Prudential retreated 25 percent to $18.76.

Technology shares in the S&P 500 added 0.4 percent. Oracle surged 9.7 percent to $17.37 after the world’s second-largest software maker reported third-quarter profit that topped estimates by 11 percent.

Airlines fell after the International Air Transport Association said losses this year may exceed the $2.5 billion projected in December as the global recession saps demand.

UAL Corp., parent of United Airlines, tumbled 14 percent to $5.19. AMR Corp., operator of American Airlines, dropped 10 percent to $3.08.

Companies in the S&P 500 Energy Index rose as investors rushed to commodities. Speculation that the Fed’s steps to revive the U.S. economy will spur demand for raw materials as a hedge against inflation pushed crude oil up over $52 a barrel to the highest price since Dec. 1.

Energy Shares

Chevron Corp. gained for a fourth day, adding 0.8 percent to $67.13. Hess Corp. advanced 7.6 percent to $64.92.

“If you look at energy stocks, they all bottomed in late October,” said Brian Barish, Denver-based president of Cambiar Investments LLC, which manages about $4 billion. “Oil is a good inflation hedge and they aren’t making any more of it.” Cambiar has 25 percent of its funds in energy companies.

Every commodity in the Reuters/Jefferies CRB Index of 19 prices climbed, while the dollar tumbled.

The Fed’s initiative, aimed at preventing the economy from sinking further, was followed by a report showing the number of Americans collecting jobless benefits swelled to a record 5.47 million, indicating that former employees are unable to find new work as companies continue to cut costs. Initial jobless applications last week topped 600,000 for a seventh straight time, the worst performance since 1982.

Philadelphia Manufacturing

Other data showed manufacturing in the Philadelphia region shrank in March for the 15th time in the last 16 months as orders and employment weakened.

Drug companies slid after retail sales of prescription medications rose at the slowest pace in 47 years as cost- conscious consumers favored cheaper generics, said IMS Health Inc., which compiled the data.

Pfizer Inc. fell 3.9 percent to $13.70 and Merck & Co. slumped 3.4 percent to $26.04. Health-care shares in the S&P 500 lost 2.5 percent, the second-steepest decline among 10 industries after financials. The group accounts for 15 percent of the S&P 500, the second-biggest weighting after technology shares.

To contact the reporter on this story: Cristina Alesci in New York at calesci2@bloomberg.net.