U.S. Stocks Retreat to Trim Biggest Yearly Rally Since 2003

Dec. 31 (Bloomberg) -- U.S. stocks fell as an unexpected decrease in jobless claims added to evidence the economy is strengthening enough to allow the Federal Reserve to withdraw more stimulus programs.

Hewlett-Packard Co. and Caterpillar Inc. lost at least 0.9 percent to lead the Dow Jones Industrial Average lower. The S&P 500 trimmed its 2009 gain to less than 25 percent after this year’s surge left it trading at 25 times its companies reported earnings, the most expensive level since 2002.

The S&P 500 lost 0.2 percent to 1,124.2 at 10:47 a.m. in New York. The Dow slipped 31.29 points, or 0.3 percent, to 10,517.22. Asian shares and stocks in the U.K. and France advanced, while most European markets, including Germany and Switzerland, were closed.

“There might be some fatigue in the stock market, despite momentum,” said Joseph Saluzzi, co-head of equity trading at Chatam, New Jersey-based Themis Trading LLC. “Jobless claims numbers show we’re heading in the right direction. However, you have to be careful with those weekly figures because they have a lot of seasonality and volatility. It’s also a double-edged sword. The better the economy gets, the more likely the Fed will raise rates.”

The S&P 500 has rebounded 66 percent from a 12-year low in March after governments around the world enacted stimulus measures to end the recession.

VIX Tumbles

This year’s rally has driven down the cost of protection from losses. The VIX, as the Chicago Board Options Exchange Volatility Index is known, has tumbled 75 percent to 20 since soaring to an all-time high of 80.86 in November 2008. It measures the cost of using options as insurance against declines in the S&P 500.

The S&P 500 has declined 23 percent since the end of 1999, its first drop for a decade since the 1930s. Including reinvested dividends, investors lost 0.9 percent a year since 1999, the first decade of negative annualized returns in the index’s history stretching back to 1927, according to S&P analyst Howard Silverblatt.

“The new year will probably end up being a good year,” Sam Stovall, chief investment strategist at S&P, told Bloomberg Radio. “Earnings are supposed to start picking up this quarter. We’ll probably see about a 10 to 15 percent gain in the S&P 500 in the second year of this bull market.”

YRC Worldwide Inc. slumped 11 percent to 89 cents. The largest U.S. trucking company said bondholders agreed to swap their debt for equity in the largest U.S. trucker, enabling the company to avoid a bankruptcy filing that may have resulted in liquidation.