Inside Financial Markets

U.S. Stocks Decline Broadly After Fed’s Statement

brenankiU.S. Stocks Decline Broadly After Fed’s Statement

NEW YORK–Hints that the Federal Reserve could pull back on its easing efforts later this year sent stocks broadly lower, with high-dividend-yielding stock sectors leading declines.

After falling modestly in the initial minutes following the release of the Fed’s latest policy decision Wednesday afternoon, stocks went into a slide that lasted until the closing bell.

The Dow Jones Industrial Average slipped 206.04 points, or 1.35%, to 15112.19. The Standard & Poor’s 500-stock index fell 22.88 points, or 1.4%, to 1628.93, and the Nasdaq Composite Index declined 38.98 points, or 1.1%, to 3443.20.

The Fed news hit the bond market particularly hard. The yield on the 10-year note rose to 2.308%, its highest level since March 2012, from around 2.21% before the Fed statement.

Driving the selloff was the long-awaited Fed policy meeting. While the Fed took no immediate action to scale back on its stimulus efforts, investors were unnerved by the improving economic outlook and comments from Fed Chairman Ben Bernanke suggesting the Fed could curtail its easing efforts by the end of 2013.

“The statement and the tone of the press conference are a bit more optimistic about the economy, and there is a growing consensus that he will probably begin scaling back monthly purchases,” said Quincy Krosby, market strategist at Prudential Financial, which manages roughly $1 trillion in assets.

Bernanke is “saying that changes will be data dependent, but markets…don’t like transitions,” she said.

Stock sectors with high dividend yields, and thus a greater connection to changes in interest rates, took the biggest hit. They often act as a source of stable income when interest rates are low.

Utilities, consumer staples and health-care shares were among the worst sector decliners in the S&P 500, falling 2.3%, 2% and 1.6%, respectively. Telecommunications shares, which also offer a high yield, weighed on the index most, losing 2.7%. The sector, which includes just seven stocks, took a hit from a 4.4% decline in Sprint Nextel after Dish Network effectively dropped its pursuit of the company.

“There’s no doubt we’ve seen that pivot” out of high-yielding stocks, said Jim Dunigan, chief investment officer with PNC Wealth Management, which has $116 billion in assets under management.

Long-term investors started the day with some light selling, but hedge funds started “piling on” in later trading, he added, Scott Rice, head health-care stock trader with BMO Capital Markets.

Smaller stocks and technology shares outperformed broader indexes during the selloff. The Russell 2000 Index lost 1.3%, and the S&P 500’s tech sector was the second-best performer in the index, losing 1%.

“It looks like tech and energy are holding up better than other sectors. We’re seeing a fair amount of rotation” into those areas, he said. “There’s a lot of buying of tech out of European accounts.”

While the Fed news rattled markets, the S&P 500 is remains 0.1% higher for the week, and is up 14% year-to-date.

The market reaction was “a knee-jerk reaction that’s focusing more on the perceived negatives of a future landscape of less stimulus, while ignoring the positives,” said Brian Ferguson, who helps oversee $7.3 billion as a senior managing director at The Boston Company Asset Management. The positives, he said, include improving economic prospects, improving prospects for earnings and dividend growth and still-attractive valuations in equities.

Mr. Ferguson has recently bought shares in life insurers, which are poised to benefit from higher interest rates, and technology and industrial companies, whose sales could benefit from increased corporate spending. He said the Fed’s statement confirmed his view that U.S. economic prospects are improving.

In currency moves, the dollar reversed losses against euro and rallied against the yen on the news. It also gained on commodity-related currencies such as the Australian dollar and Norwegian krone. Any tapering of the Fed’s stimulus measures, which flood the market with dollars on a monthly basis, is seen as a positive for the greenback.

Gold futures for June delivery initially fell to $1,363 a troy ounce, but recovered some of those losses. It settled down 0.5% to $1373.60 a troy ounce.

Crude oil futures for July delivery fluctuated following the release of the Fed statement, settling down 0.2% at $98.24 a barrel, after trading higher immediately following the statement’s release.

Before the Fed news, European markets closed lower. The Stoxx Europe 600 was down 0.2%, while the U.K.’s FTSE 100 lost 0.4% after the minutes of the last Bank of England policy meeting showed that outgoing Governor Mervyn King was defeated in a push for more stimulus.

Japan’s Nikkei Stock Average climbed 1.8%, on the back of strength in exporter shares, to extend its recent rally. Since June 13, when the Nikkei closed 20.4% below its May 22 multiyear high, the index has gained 6.4%. China’s Shanghai Composite shed 0.7%.

In corporate news, FedEx gained 1.1% after reporting adjusted fiscal fourth-quarter earnings above Wall Street expectations. The international air-shipping company rose despite providing a disappointing outlook for full-year earnings growth.

Adobe Systems jumped 5.6% after the software company reported better-than-expected fiscal second-quarter earnings, boosted by a sharp increase in net new subscribers to its Creative Cloud online service.


Sanie Khan

Sanie Khan holds a deep knowledge of the financial markets in Pakistan. Based in Karachi, he has over 20 years of hands-on management experience in financial technologies and managing operations in the financial sector. He was the General Manager at the Pakistan Stock Exchange (PSX) for 17 years. He along-with senior members of Exchange

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)