By Dan Strumpf
U.S. stocks fell on Wednesday after Federal Reserve Chairwoman
Janet Yellen drew attention to elevated valuations in the equity
market.
Ms. Yellen made the remarks in a conversation with International
Monetary Fund Managing Director Christine Lagarde, who asked the
central bank chief about the possibility that the Fed's rock-bottom
interest-rate policy was leading to bubbles in financial
markets.
The Dow Jones Industrial Average fell 86.22 points, or 0.5%, to
17841.98, while the S&P 500 index shed 9.31 points, or 0.45%,
to 2080.15. The Nasdaq Composite Index declined 19.68 points, or
0.4%, to 4919.64.
The declines capped a volatile session for stocks, which rose at
the opening bell, then reversed course within the first half hour
of trading. The losses snowballed following Ms. Yellen's remarks,
with the Dow falling as much as 195 points, before paring
losses.
"Risks to financial stability are moderated, not elevated at
this point, " Ms. Yellen said, though she added that stock-market
valuations appear "quite high" and some bond and loan markets
suggest investors may be taking excess risks.
Investors seized on the warning, which comes amid a recent spate
of negative economic headlines and one of the weakest quarterly
earnings seasons in several years. Trading volumes were elevated,
with more than 7 billion shares trading hands.
"You came in hoping for a reason to buy stocks, and the market
hasn't given us that for a while," said Larry Weiss, head of
trading at brokerage Instinet in New York. "When something comes
out [from the central bank] that's unscripted, or surprises people,
people definitely use it as an excuse" to trade.
The comments weren't the first time Ms. Yellen has raised
concerns about the risks of high valuations in the stock market.
Last July, in a biannual report to Congress, the central bank
sounded alarm about lofty prices of social-media and biotechnology
stocks, prompting a short-lived pullback in those sectors.
Wednesday's pullback marked the second consecutive day of losses
for major stock benchmarks, the latest move in a sideways year for
stocks. The Dow is up just 0.1% for the year, and has fallen 2.4%
from its last record close reached in early April. The S&P 500
is up 1% for the year, but down 1.8% from its late-April
record.
Above-average stock valuations have for years been a concern for
investors as the bull-market in equities enters its sixth year. The
S&P 500 index now trades at 17.5 times the last 12 months of
earnings, according to FactSet. The 10-year average P/E ratio for
the index is 15.8.
Ms. Yellen's latest warning over valuations is the latest cause
for hand-wringing by investors, following a raft of data suggesting
the U.S. has entered an economic rough patch. Last week, the
Commerce Department said gross domestic product grew at a paltry
0.2% pace in the first quarter, while the country's trade deficit
widened.
At the same time, earnings growth all but stalled in the first
quarter. With 417 companies reporting first-quarter results,
earnings among companies in the S&P 500 are on pace to grow
just 0.2%, according to FactSet. Still, that's better than the
forecast for a 4.7% decline in earnings at the end of March.
On Friday, the federal government is due to release its closely
watched jobs report for April. Economists expect the Labor
Department to report that 228,000 jobs were added last month, up
from 126,000 jobs added in March. The unemployment rate is expected
to fall to 5.4% from 5.5%.
Energy stocks shed their early gains as oil prices pulled back
from a sharp advance. Shares of energy companies in the S&P 500
fell 0.3%. U.S. oil prices gained 0.9% to $60.93 a barrel after
data showed U.S. oil stockpiles finally declined last week for the
first time in 16 weeks.
A monthslong recovery in oil prices has prompted a big rebound
in shares of energy companies. The S&P 500 Energy Index is 3%
higher in the last month, compared with near-flat performance for
the S&P 500.
"Oil prices have shot up pretty quickly," said David O'Malley,
chief executive of Penn Mutual Asset Management, which has $20
billion under management. "This increase back to $60 a barrel
alleviates some of the fears" about what low oil prices could mean
for the fracking industry and more levered energy companies, he
added.
The yield on the 10-year Treasury note rose to 2.236% as prices
fell.
European stocks were mixed Wednesday. Germany's DAX index gained
0.2% and France's CAC 40 rose 0.2%. The Stoxx Europe 600 index
declined 0.6%.
Meanwhile, investors received a disappointing report Wednesday
on private-sector employment. Private payrolls in the U.S.
increased by 169,000 in April, according to a report compiled by
payroll processor Automatic Data Processing Inc. and forecasting
firm Moody's Analytics. Economists surveyed by The Wall Street
Journal had expected an increase of 205,000 jobs.
First-quarter earnings reports prompted some moves by individual
stocks. Chesapeake Energy Corp. said Wednesday it had swung to a
loss in the first quarter as the shale driller took a $3.6 billion
write-down. Excluding the impairment and other special charges,
profit came in above expectations. Shares fell 7.2%.
Mylan NV said Tuesday its revenue rose a less-than-expected 9%,
as foreign currency and acquisition costs weighed on results. The
company affirmed its full-year outlook. Shares fell 2.5%.
Alexion Pharmaceuticals Inc. has agreed to buy Synageva
BioPharma Corp. in a cash-and-stock deal valued at $8.4 billion.
Alexion shares fell 8%, while those of Synageva surged 112%.
Write to Dan Strumpf at daniel.strumpf@wsj.com
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