Stocks in U.S. Decline as China Reduces Its Target for Economic Growth

By Rita Nazareth - Mar 5, 2012 10:18 PM GMT+0700

U.S. stocks declined, following a three-week advance for the Standard & Poor’s 500 Index, as China reduced its economic growth target and a measure of euro-area services output shrank more than estimated in February.

EBay (EBAY) Inc., Joy Global Inc. (JOY) and Advanced Micro Devices Inc. (AMD) dropped more than 1.5 percent to pace losses among the biggest companies. Zynga Inc. (ZNGA), the online-game company that sold shares to the public in December, and CF Industries Holdings Inc. (CF), North America’s largest maker of nitrogen-based fertilizer, lost at least 3.1 percent after the companies were downgraded.

The S&P 500 fell 0.3 percent to 1,366.09 at 10:17 a.m. New York time. The benchmark index for American equities briefly pared losses as data showed service industries in the U.S. unexpectedly expanded in February. The Dow Jones Industrial Average slid 23.61 points, or 0.2 percent, to 12,953.96.

“It’s just not an environment that we feel like sticking our neck out to take on a lot of risk,” said Michael Mullaney, who helps manage $9.5 billion at Fiduciary Trust in Boston. “We’ve been scratching our heads a little bit after the big run-up in equities. We just don’t see a strong enough global economic background to support where prices are right now.”

Equities joined a global slump as China pared its growth target to 7.5 percent from an 8 percent goal in place since 2005. Euro-area services output shrank more than estimated, led by Italy and Spain. In the U.S., orders to U.S. factories decreased for the first time in three months. Separately, the Institute for Supply Management’s index of non-manufacturing industries rose to 57.3 in February from 56.8 a month earlier.

Stock Valuation

Stocks rose last week as data on housing and jobs improved. The S&P 500 (SPX) fell on March 2 amid concern that a rally to the highest level since 2008 has outpaced growth prospects. It trades at 14.1 times reported earnings, the highest since August while still below the average since 1954 of 16.4 times.

Some of the largest companies retreated. EBay lost 1.5 percent to $35.72. Joy Global dropped 3.9 percent to $82.42. Advanced Micro Devices declined 1.6 percent to $7.34.

Zynga (ZNGA) slipped 5.4 percent to $13.90. The biggest developer of games for social-networking sites was cut to neutral from overweight by JPMorgan, meaning the shares are expected to perform in line with the stocks the analyst covers over the next six-to-12 months. JPMorgan cited Zynga’s rally since the end of January.

CF Industries fell 3.1 percent to $182.34 after being cut to “neutral” from “buy” at Citigroup Inc. (C) and removed from the firm’s “Top Picks Live” list.

Pandora Media Inc. (P) rose 4.2 percent to $14.48. The online music service provider was upgraded to buy from hold at Stifel Nicolaus & Co., which cited the expansion of the company’s advertising sales staff.

Paris Store

Tiffany & Co. (TIF) gained 0.9 percent to $68.09. The company’s flagship Paris store in the city’s fashion district was put on the market for more than 30 million euros ($40 million), according to CBRE Group Inc., the broker handling the sale.

Corporate profits that doubled since 2009 have left the S&P 500 cheaper than at all 34 peaks since 1989, even as options traders push the cost of protecting against losses to the highest in four years.

The S&P 500 advanced 102 percent since March 2009 to an almost four-year high last week, data compiled by Bloomberg show. Valuations are lower than at every 52-week peak since 1989. Traders have pushed the price of contracts that pay should the S&P 500 drop 20 percent to the most since 2007 compared with ones betting on a rally of the same size.

Rising oil prices and concern European leaders have yet to contain the credit crisis are keeping investors from paying more for profits, which are projected to reach annual records through 2013.

Bears vs Bulls

Bears say equities aren’t cheap because the profit estimates are too optimistic. Bulls say shrinking price-earnings ratios provide a margin of safety should gains in the U.S. economy fail to match forecasts.

“Stocks have just gotten too cheap,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview. His firm oversees $160 billion. “We were worrying about a Chinese hard landing that didn’t happen. We worried about a U.S. double dip and that didn’t happen. We worried about Europe disintegrating, that didn’t happen. The worst risks have passed.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net