By Edward Krudy
NEW YORK (Reuters) – Stock index futures fell sharply on Thursday evening as JPMorgan Chase Co stunned investors with news that its chief investment office had incurred “significant mark-to-market losses” that it said could “easily get worse.”
JPMorgan’s stock (JPM) fell nearly 7 percent to $38.05 in after-hours trading and dragged down shares across the entire banking sector. Its executives called an extraordinary conference call with analysts at 5 p.m. EDT where Chief Executive Jamie Dimon said “egregious” mistakes had been made.
The news from JPMorgan comes at a difficult juncture for the stock market as investors wrestle with heightened concerns about Europe’s debt crisis and signs are emerging that the U.S. economic recovery may be starting to slow.
“When there’s uncertainty, investors’ first reaction is to sell,” said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut. “This is not the kind of news you expect from a high-quality management team and a well-run bank.”
SP 500 futures fell 11.6 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration of the contract. Nasdaq 100 futures fell 16.75 points.
If there is nothing to reassure investors between now and the start of trade on Friday the weakness in likely to spill over into the cash market.
Shares of JPMorgan’s peers fell sharply after hours on the news. Bank of America (BAC.N) stock fell 2.9 percent to $7.48 and Goldman Sachs (GS.N) dropped 2.5 percent to $103.65, while Citigroup (C.N) lost 3.9 percent to $29.45.
The Chief Investment Office is the arm of the bank that JPMorgan has said it uses to make broad bets to hedge its portfolios of individual holdings, such as loans to speculative-grade companies.
BIG SHOCK AFTER A TEPID DAY
The news came after a lackluster day for stocks. The Dow and the SP 500 eked out a modest gain as investors had dipped back into the market after a weak stretch, but a disappointing outlook from Cisco Systems capped gains.
Cisco Systems Inc (CSCO) lost 10.5 percent to $16.81, its biggest percentage drop since February 2011, making it the heaviest drag on the market. The network equipment maker forecast profits below Wall Street’s estimates, sparking concerns about technology spending.
In a positive development, euro-zone officials said the bloc’s countries are prepared to keep financing Greece until the country forms a new government.
The Dow’s modest rise broke a six-day losing streak for the blue-chip average. But the SP 500 could not hold enough gains to close above its April low. Still, the SP has rebounded after falling to a two-month low near 1,340 on Wednesday.
“You are seeing traders and investors come into some of these very oversold sectors and buying on the dips. Then suddenly, the people who are scared decide to start selling into it,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.
“That is what you are seeing today. You are seeing the see-saw between people who are coming in, and adding positions slowly, and people who are saying, ‘The world is coming to an end. I want out.’”
On Thursday, the Dow Jones industrial average (DJI:^DJI) rose 19.98 points, or 0.16 percent, to close at 12,855.04. The Standard Poor’s 500 Index (MXP:^SPX) added 3.41 points, or 0.25 percent, to end at 1,357.99. But the Nasdaq Composite Index (NAS:^COMP) fell 1.07 points, or 0.04 percent, to close at 2,933.64.
The latest uncertainty surrounding Greece and the euro zone’s sovereign debt crisis helped spark a drop in the SP 500 in five of the past seven sessions, sending the benchmark index down 4 percent. While the region’s difficulties persisted with the political gridlock in Greece, investors used the market’s declines as a buying opportunity.
The CBOE VIX Volatility Index (.VIX), used as a measure of investor anxiety, fell 6.2 percent to 18.83. This week, the VIX closed above 20 for the first time in a month in a sign of growing caution.
The number of Americans applying for jobless benefits fell last week, but from an upwardly revised figure from the previous week. The report follows last month’s nonfarm payrolls report, which showed weak employment growth in April.
Signs of softness in the U.S. economy recently have led some investors to err on the side of caution and cut back on sectors exposed to the vicissitudes of the economic cycle.
The Standard Poor’s 500 could fall 5 percent to 7 percent from its April high, and see “several months” of choppy trading, said Citigroup’s chief U.S. equity strategist Tobias Levkovich.
“I don’t see that as unreasonable,” he said. “The solutions to some of these things are not imminent. People forgot them and got a little bit too excited.”
On the plus side, News Corp (NWSA) rose after its profit beat expectations late Wednesday and it announced a $5 billion stock buyback. Its stock climbed 4.9 percent to $20.32.
With 449 of the SP 500 companies reporting results through Thursday morning, 66.4 percent exceeded estimates, according to Thomson Reuters data, compared with more than 80 percent at the start of earnings season.
Volume was 6.75 billion shares on the New York Stock Exchange, the Nasdaq and the NYSE Amex, just above the 50-day moving average of 6.65 billion.
On the NYSE, more than three shares rose for every two that fell, while for the Nasdaq, about seven stocks advanced for every five that fell.
(Reporting by Edward Krudy, Additional reporting by Caroline Valetkevitch; Editing by Jan Paschal)