Most U.S. Stocks Drop as Health-Care, Commodity Shares Slump

By Lynn Thomasson

June 8 (Bloomberg) -- Most U.S. stocks fell for a second day as a drop in health-care and materials shares overshadowed a late-day rally spurred by Nobel Prize-winning economist Paul Krugman’s prediction the recession will end by September.

Cigna Corp. and Aetna Inc. slid more than 5.1 percent as Goldman Sachs Group Inc. said government reform is likely to hurt profitability in the health-care industry. U.S. Steel Corp. and Allegheny Technologies Inc. led commodity shares lower as metal prices slid. American Express Co. and JPMorgan Chase & Co. climbed more than 2.4 percent to lead the Dow Jones Industrial Average higher after Krugman said “there’s some reason to think that we’re stabilizing.”

More than two stocks fell for each that rose on the New York Stock Exchange. The S&P 500 slipped 0.1 percent to 939.14 at 4:12 p.m. after tumbling as much as 1.5 percent in midday trading. The Dow added 1.36 points, or less than 0.1 percent, to 8,764.49. About 1.1 billion shares changed hands on the NYSE, the third-slowest trading day of the year.

“When you have light volume, it doesn’t take too many people moving in one direction to move stock prices,” said Peter Jankovskis, who helps manage $1.3 billion at OakBrook Investments in Lisle, Illinois.

The earlier tumble in equities came amid growing concern the Federal Reserve will raise interest rates as inflation accelerates. Fed funds futures trading shows 35 percent odds policy makers will lift the benchmark interest rate by its September meeting, compared with a 15 percent chance a week ago.

‘Forcing Their Hand’

“There are going to be some strains on the Federal Reserve,” said Jankovskis. “Anything that’s seen as forcing their hand to raise rates more quickly than they might want to suggest the economic recovery may be slower. That for me was what the story was for much of the day.”

The S&P 500 erased losses for about 20 minutes in the final hour of trading following Krugman’s speech to the London School of Economics.

“I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer,” he said in the lecture. “Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing.”

American Express, the largest credit-card network, added 2.8 percent to $25.65 and JPMorgan, the biggest U.S. bank by market value, climbed 2.4 percent to $35.39 for the top two gains in the Dow.

Health Reform

Health-care stocks dropped 1 percent, the most among the 10 industries in the S&P 500. Insurers had the steepest declines, with Aetna, the third-largest U.S. health insurer, UnitedHealth Group Inc., the top U.S. health insurer by sales, and Cigna, the Philadelphia-based insurer, falling more than 3.8 percent.

President Barack Obama, pressing Congress to pass health- care legislation this year, will tell skeptical lawmakers in the next 10 days how he would pay for a plan most experts say would cost more than $1 trillion, U.S. officials said.

A group of Senate Republicans sent a letter to Obama declaring their opposition to including a government-run plan in a health-care overhaul, saying it would be a “federal government takeover” of the health system.

Goldman advised buying put options conveying the right to sell the Health Care Select Sector SPDR Fund, an exchange-traded fund tracking the industry, at $24 by December and said the contracts are inexpensive relative to options on the S&P 500 Index. The ETF lost 1.1 percent to $25.51 today.

Commodity Slump

U.S. Steel, the largest U.S.-based steelmaker, slid 3.2 percent to $35.06. Allegheny Technologies, which sells titanium and nickel alloys, declined 2.5 percent to $39.88. Freeport- McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, dropped 1.2 percent to $56.48.

Copper fell as the strengthening dollar reduced the appeal of commodities as an alternative investment and lifted costs for investors holding other currencies. Lower gold, silver and nickel prices helped drag the Reuters/Jefferies CRB Index of 19 raw materials to a 0.8 percent loss.

McDonald’s Corp. lost 1.9 percent to $58.72. Sales at U.S. restaurants open at least 13 months rose 2.8 percent, the company said. Analysts, on average, anticipated a 3.8 percent increase.

Treasuries fell, with the two-year note’s yield climbing 0.14 percentage point to 1.43 percent to extend its biggest weekly gain in almost a year.

‘Unprecedented Stimulus’

The Treasury is planning to sell $65 billion in notes and bonds over the next three days that will help fund programs to end the first global recession since World War II. The $12.8 trillion pledged by the government and Federal Reserve has lifted a measure of financial shares up 98 percent and a gauge of industrial stocks 54 percent higher since March 9.

“We’re still in a terrible recession, but the recession is slowly ending,” said Thomas Nyheim, a Greenville, Delaware- based fund manager for Christiana Bank & Trust Co., which oversees $4.6 billion. “With all that money coming in from the unprecedented stimulus, you know you’re going to get inflation.”

Qwest Communications Inc. slumped 5.8 percent to $3.93 after ending attempts to sell its long-distance network. Though the network drew “significant interest” in a bidding process, it holds more value as part of Qwest, the company said. Qwest had trouble finding bids for a system that was valued at as much as $3 billion, with some offers coming in at less than $1 billion, the Wall Street Journal said last week, citing people familiar with the matter.

VeriSign Inc., the biggest operator of computers that direct Internet traffic, tumbled 14 percent to $19.90 for the steepest drop in the S&P 500. Cowen & Co. said a court ruling on June 5 may raise concern about the company’s ability to raise prices on the “.com” registry.

Valuation Watch

The S&P 500 was valued at 14.8 times the earnings of its companies on June 5, data compiled by Bloomberg show, after rebounding 39 percent from a 12-year low on March 9. The gauge traded at 15.2 times profit on May 8, the highest since October, weekly data indicate.

“After equity markets, not just in the U.S. but all over the world, have gone up 35, 40 percent or more over the past three months, ideas that are immediately appealing are few,” Jean-Marie Eveillard, a senior adviser to the $7 billion First Eagle Global Fund that beat the S&P 500 every year this decade, told Bloomberg Television. “Current policies by the American government and the Fed are potentially wildly inflationary.”

Europe, Asia Fall

Europe’s Dow Jones Stoxx 600 Index declined 0.7 percent. Ireland had its credit rating lowered for the second time this year, to AA from AA+ by S&P, which cited the nation’s rising bill for propping up its banks.

The MSCI Asia Pacific Index lost 0.9 percent. Companies in the gauge currently trade at an average 1.5 times the book value of assets, the highest level since last September.

General Mills Inc. rose the most in two months, climbing 4 percent to $54.22. The maker of Cheerios and Hamburger Helper said full-year earnings will exceed its previous forecast of as much as $3.89 a share.

SLM Corp. rallied 20 percent to $7.93. The largest U.S. student lender, also known as Sallie Mae, jumped after William Blair & Co. said the company may win a contract from the U.S. Department of Education.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.