The Market Slows

The Dow lost 152.71 points, or 1.3 percent, to 11,971.73 at 2:45 p.m. in New York, its first dip below 12,000 since March, and the Standard & Poor’s 500 Index fell 1.2 percent. Ten-year Treasury yields lost three basis points to 2.97 percent, while the yen rose against all 16 major peers. The cost of insuring Greek and Portuguese debt rose to all-time highs amid lingering concern over Europe’s debt crisis. Oil sank below $100 a barrel.

U.S. equity benchmarks are threatening to erase their gains for the year amid concern that the economic recovery is weakening. The S&P 500 trimmed its 2011 advance to less than 1.5 percent today and the MSCI World Index is up 0.8 percent. The Russell 2000 Index of small U.S. stocks and the Nasdaq Composite Index both erased their gains for 2011 at least briefly today.

“The big question mark for investors is -- is this simply a transitory soft patch?” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $54 billion. “Or, if not, will this begin to weigh on corporate profits in a slow economic growth environment, and therefore equity valuations will have to be adjusted? Right now the market is saying the latter.”

Leading Declines
The S&P 500 has lost more than 2 percent this week and is down almost 7 percent from a three-year high at the end of April, while 10-year Treasury yields linger near their 2011 lows. The index is trading at about 12.1 times the forecast earnings of its companies, near the cheapest level since last summer, with analysts surveyed by Bloomberg forecasting profit growth of 20.1 percent this year.

The drivers of the slump have been an inventory correction in manufacturing because of overproduction, a slowdown in demand because of high oil prices, “spiced up with a flareup of sovereign debt pressures in the European Monetary Union periphery, plus worries about Chinese tightening,” according to JPMorgan Chase & Co. (JPM) strategists led by Jan Loeys. It also came as investors awaited the end of the Federal Reserve’s $600 billion bond-purchase program, the central bank’s third round of so-called quantitative easing that investors nicknamed “QE2.”

‘Bearish Drivers’
“How much further markets correct depends on how these bearish drivers worsen and how much investors really believe it was QE2 rather than better data that turned markets around last year,” Loeys’ team wrote in a note to clients today. “Economic data are still on net weaker though supportive of a rebound into” the third quarter.

Travelers Cos. led losses in the Dow today, sliding 2.8 percent, after the insurer said it’s scaling back share repurchases as about $1 billion in catastrophe costs will probably wipe out second-quarter operating profit.

Financial shares pared losses after CNBC reported that the maximum capital surcharge on banks being considered by international regulators may be 2 to 2.5 percentage points, not the 3 percent being widely reported. CNBC cited unidentified officials.

S&P 500 financial shares were down 0.4 percent after sliding as much as 2.1 percent earlier as the Federal Reserve announced wider scrutiny of the balance sheets of big banks. The Fed said it will expand a capital-planning program to the 35 largest U.S. lenders. Banks with at least $50 billion in assets will be required to conduct annual exams to ensure “robust, forward-looking capital planning processes that account for their unique risks and that permit continued operations during times of economic and financial stress,” the Fed said today.