U.S. stocks fluctuated as investors weighed better-than-estimated bank earnings and economic data against Federal Reserve comments that some sectors have excessive valuations. Treasuries were little changed and the dollar strengthened as Chair Janet Yellen told lawmakers the central bank must press on with stimulus.
The Standard & Poor's 500 Index fell 0.1% at 1:50 p.m. in New York. The Russell 2000 Index of small companies sank 0.8% after a Fed report said valuations of some biotechnology and social media stocks may be "substantially stretched." JPMorgan Chase & Co. and Goldman Sachs Group Inc. rose at least 1.2% after the banks reported better-than- forecast earnings. U.S. crude fell below $100 a barrel for the first time since May. The yield on 10-year Treasury notes fell one basis point to 2.54, near the lowest in six weeks. The dollar gained against most major peers.
The central bank must press on with stimulus as "significant slack" remains in labor markets and inflation is still below the Fed's goal, Yellen said in semi-annual remarks before Congress. Retail sales data today showed a broad-based increase in June, which probably helped the U.S. economy rebound in the second quarter. JPMorgan Chase said second-quarter profit beat estimates and Goldman Sachs reported a surprise increase in earnings.
"There was a short-term reaction there to that comment and the markets pretty much digested it," Walter "Bucky" Hellwig, a Birmingham, Alabama-based senior vice president at BB&T Wealth Management, said in a phone interview. "What it did is throw some cold water on some of the better earnings reports that were out earlier and had the markets on a roll. For a long-side investor it was disappointing that she had to use those terms specifically."
Senate Address
Yellen repeated her comments from last month that the Fed will keep interest rates low for a considerable time after ending its asset-purchase program, even as it saw improvements in the economy and labor market.
"A high degree of monetary policy accommodation remains appropriate," Yellen said today. "Although the economy continues to improve, the recovery is not yet complete."
Yellen cited labor-market weaknesses even after an unexpectedly fast decline in unemployment put pressure on Fed officials to consider accelerating their timetable for an interest-rate increase. Minutes from the Fed's June meeting, released last week, showed some policy makers were concerned investors may be growing too complacent about the economic outlook and the central bank should be on the lookout for excessive risk-taking.
Substantially Stretched
"Valuation metrics in some sectors do appear substantially stretched, particularly those for smaller firm in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year," the Fed said today in a separate report.
The Dow Jones Internet Composite Index slid 0.6%. The gauge had rallied 15% from a low on May 8 to erase its losses for the year before falling 3.2% last week. The barometer surged 54% in 2013.
Pandora Media Inc., which trades at more than 160 times projected earnings, fell 1%. Facebook Inc. and TripAdvisor Inc., which rallied more than 98% in 2013, lost at least 1.1%.
The Nasdaq Biotechnology Index slid 1.7%, after falling 3.2% last week, the most since April 11. It had rallied as much as 23% since a low that month.
The Standard & Poor's Smallcap 600 Index trades at 26 times reported profit and the Nasdaq biotechnology index has a multiple of more than 500, according to data compiled by Bloomberg. The broader S&P 500 has a price-earnings ratio of 18, the highest level since 2010.
Rate Sensitivity
"The Fed wants to pay attention to valuations given that they might have to change the interest rate backdrop that has been a strong catalyst for the market," Eric Teal, who helps oversee about $3.6 billion as the chief investment officer at First Citizens BancShares Inc. in Raleigh, North Carolina, said by phone. The small cap area is going to be much more interest rate sensitive.''
The Fed report overshadowed data today showing U.S. retail sales rose 0.2% in June after a 0.5% advance in May that was larger than previously reported. The New York Fed's Empire manufacturing report unexpectedly rose to 25.6 for this month from 19.28 last month. The S&P 500 climbed 0.5% yesterday, the most since July 3, to rebound from its worst week since April. Profit at S&P 500 companies probably rose 4.5% in the three months through June while sales advanced 3.1%, analyst estimates compiled by Bloomberg show.
Bank Earnings
JPMorgan Chase climbed 3.9% and Goldman Sachs rose 1.2% to lead an index of banks to the biggest advance among 24 groups in the S&P 500. Both firms reported fixed-income revenue that topped estimates. Banks have seen profits hurt in recent quarters as the Fed slows its bond buying and fixed- income clients make fewer bets amid low volatility.
