U.S. stocks fell for the first time in five weeks as an unexpected drop in consumer confidence fueled concern the steepest rally since the 1930s isn’t justified by economic prospects.
Best Buy Co. sank the most in two months, losing 8.3 percent, after Goldman Sachs Group Inc. said increased competition may hurt profits at the world’s largest electronics retailer. Morgan Stanley and Bank of New York Mellon Corp. declined at least 4.5 percent after Dick Bove, an analyst at Rochdale Securities, said financial companies’ earnings won’t improve in the second half of the year. J.C. Penney Co. and Sara Lee Corp. slid more than 9 percent as their earnings forecasts trailed estimates.
“What really could cause a pause is investors observing valuations and worrying that stocks could be ahead of themselves,” said Lawrence Creatura, a Rochester, New York- based money manager at Federated Investors Inc., which oversees $407 billion. “The consumer is on his back.”
The Standard & Poor’s 500 Index fell 0.6 percent to 1,004.09. The Dow Jones Industrial Average dropped 48.67 points, or 0.5 percent, to 9,321.4. The Nasdaq Composite Index retreated 0.7 percent to 1,985.52. The Russell 2000 Index of small companies lost 1.5 percent to 563.9.
U.S. stocks are “dramatically overpriced” because the fallout from the financial crisis will continue to hurt consumer spending, said David Tice, Federated Investors Inc.’s chief portfolio strategist for bear markets. Tice, who spoke in an interview with Bloomberg Television, predicted that the S&P 500 will eventually slump to 400 and said he would add to short positions if the market goes much higher.
The 50 percent rebound in the S&P 500 through Aug. 13 from a 12-year low on March 9 pushed the index’s valuation to 18.7 times the profits of its companies, the highest level since December 2004, according to Bloomberg data. The rally was the fastest since at least 1938, according to Bloomberg data.
Best Buy tumbled 8.3 percent to $36.44. Goldman Sachs downgraded the retailer to “neutral” from “buy,” citing its “aggressive” spending to fuel growth.
A measure of retailers, hotels and restaurants in the S&P 500 dropped 2.6 percent for the steepest decline among the 10 main industries in the index. The group has rallied 20 percent this year.
Forecasts Miss Estimates
J.C. Penney retreated 9.1 percent to $31.29. The third- largest U.S. department-store chain issued a third-quarter forecast that missed analysts’ estimates amid declining sales. Results in the current quarter may range from a loss of 5 cents a share to a profit of 5 cents, the company said. Analysts had projected a 13-cent profit, the average of estimates compiled by Bloomberg.
Sara Lee, the maker of frozen cakes and Jimmy Dean sausages, slid 12 percent to $9.45. Weakening revenue from the company’s household and body-care products drove its 2010 earnings prediction below analysts’ estimates.
Confidence among shoppers unexpectedly declined this month amid growing concern over jobs and wages. The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2, the lowest since March, from 66 in July. Economists had forecast it would rise to 69, according to the median projection in a Bloomberg News survey.
“There’s some cautiousness about the outlook for the rest of this year and next year,” said John Carey, a Boston-based money manager at Pioneer Investments, which oversees $236.5 billion worldwide. “This spring it seemed that consumer confidence was coming back, and now it seems to be falling off again.”
‘Take Some Profits’
Morgan Stanley slumped 4.6 percent to $29.79. Bank of New York Mellon retreated 5.7 percent to $28.57. The rally that more than doubled the KBW Bank Index since March was driven by a change in attitude and not the near-term earnings outlook, Bove said.
“The rational investor would step away from psychology at this point and take some profits,” he wrote in an Aug. 11 research report.
Wal-Mart Stores Inc. climbed 5.1 percent, the most since March, to $51.79. The world’s largest retailer reported second- quarter profit that beat analysts’ forecasts after managing inventory to reduce costs. The chain also attracted more customers, helped by price reductions on its Sam’s Choice Black Angus beef patties, baked beans and flat-panel televisions.
Target Corp., Home Depot Inc. and Hewlett-Packard Co. are among companies in the S&P 500 scheduled to release results next week. The housing and manufacturing slumps that pushed the U.S. into the worst recession since the 1930s probably eased, economists forecast reports next week will show.