Dow falls 354 as Fed fallout spreads
Stocks slump for a 2nd day after Fed Chairman Bernanke outlines a process that could end quantitative easing. Here are five key numbers that will tell you how bad the sell-off might get.
Updated: 2:54 a.m. ET Friday
Stocks tanked on Thursday, due mostly to Federal Reserve Chairman Ben Bernanke's saying the Fed might start cutting back on its $85-billion-a-month bond-buying program.
The market was also hurt by weakness in China.
The Dow Jones industrials ($INDU) fell 354 points to 14,758. The Standard & Poor's 500 Index ($INX) was off 41 points to 1,588, and the Nasdaq Composite Index ($COMPX) had dropped 79 points to 3,367.
The Dow suffered its biggest loss of the year, its first 300-point loss since Nov. 7 and a 2-day loss of nearly 560 points, potentially the worst two-day decline since Oct. 31-Nov. 1, 2011. With today's finish, the Dow, S&P 500 and Nasdaq have lost all of their gains in June and May.
Interest-rate sensitive stocks, such as -- and especially -- homebuilders and real estate investment vehicles -- were hardest hit by Thursday's selling.
Gold (-GC), silver (-GC), copper (-HG) and crude oil (-CL) prices dropped sharply. The dollar rose against major currencies. The 10-year Treasury yield climbed to 2.419% from Wednesday's 2.311% and 1.63% on May 2.
Federal funds are the money banks lend each other overnight to meet reserve requirements. The Fed has kept a target of 0% to 0.25% since December 2008.
The market's big slump was a surprise to many investors, who themselves were surprised program and projecting that the Fed might start to raise its key federal funds rate some time in 2015.
The Fed has been in a third-round of bond buying since the 2008-2009 crisis. The goal of the bond buying has been to keep long-term interest rates low and nurse the modest economic recovery along. It has also pushed bond and stock prices higher.
Bernanke said Wednesday that, based on current economic conditions, the Fed might start to trim its bond purchasing starting in the fall and end them in the fall. The Fed would hold onto the securities it owns and reinvest the interest from them, expecting that activity to help keep long-term rates low. A Bloomberg survey economists expect the Fed to trim the bond buying to $65 billion a month at its Sept. 17-18 meeting.
House Speaker John Boehner blamed the sell-off on the Fed and Bernanke in a CNBC interview.
At the end of trading Thursday, the Dow was still up 12.6% for 2013, with the S&P 500 up 11.4% and the Nasdaq up 11.5%.
Friday holds the hope for a positive open for U.S. stocks, futures trading suggested. Japanese stocks were higher; the Nikkei 225 Index ($JP:N225) rose 216 points to 13,230. Other Asian and Pacific stocks were off slightly, including the Shanghai Composite Index.
The market's Thursday reaction to Bernanke's comments should not have been a be a surprise. The fed funds rate had been cut to 1% by the Alan Greenspan-led Fed after the Sept. 11, 2001 terror attacks. The Fed had said the rate was temporary.
On June 30, 2004, the Fed boosted the rate to 1.25%. In reaction, the Dow fell 2.5% over the next five sessions. And then climbed 6% by the end of the year, ending 2004 with a 3.2% gain.
The market in 2013 has probably been due for a pullback of 8% to 10% from its intraday highs reached on May 22.
The Dow, S&P 500 and Nasdaq were all up around 17% FOR THE YEAR on May 21. Those gains alone cried out for a decline. Moreover, stocks routinely have sizable sell-offs during the year.
The next question raised by the sell-off is if it's like 2003 or worse. Domestically, there aren't a lot of catalysts in place that could send the market to huge losses. There are a couple of potential non-U.S. catalysts: Europe, which is still struggling with a broken financial system, and China, which is seeing manufacturing growth slow and is struggling with its own banking crisis that has sent short-term rates jumping. China's benchmark Shanghai Composite Index is down 8% this year.
If you look at the 2008 crash, the signals had been loud and clear for months that something very bad was coming. It was clear by the summer of 2007 that the housing market was in deep trouble. There were obvious signs of stress among financial institutions. Oil prices were soaring, and auto sales were dropping like a rock.
So, what about now? Here are five numbers I am watching right now.
1,600, 1582 and 1565 on the S&P 500 Index. The S&P 500 represents about 75% of the market value of the U.S. stock market. The index fell below 1,600 for the first time since May 2. 1,600 has been an important support level, meaning that buyers will come in when the index nears that level. The index held above 1,600 for much of the day but lost that level in the mid-afternoon. The index tested 1598 twice on June 6 and held. With 1,600 gone, the next big support level is 1,582, with 1,565 after that. Why 1,565? That's the index's peak close in 2007 that was finally exceeded on March 28.
The 50-day moving averages. The 50-day simple moving averages are a nice gauge of investor confidence. If a stock or index drops under the average, that suggests some wariness. The bigger the gap below suggests confidence is falling. On Thursday, the 50-day averages for the Dow and S&P 500 are trading at about 1.8% under their 50-day moving averages, with the Nasdaq 0.7% below its 50-day average. Not great but not awful. If you want awful, check Oct. 14, 2008, during the worst of the crash, when the S&P 500 was trading 24% below its 50-day moving average.
The price of gold. Gold for August delivery settled at $1,286.20 an ounce on Thursday, a decline of 6.4% and the lowest settlement since September 2010. Since peaking at about $1,920 an ounce in September 2011, gold has fallen 33%. It's down 19.4% in the second quarter and 23.3% in 2013. Gold is supposed to be a signal of inflation. The signal right now is anything but. But gold is now so low that there are people, other than gold bugs, who say the price is a bargain.
The 10-year Treasury yield. The yield climbed to 2.45% before drifting back. That was the highest level since August 2011 as the debt crisis of 2011 erupted. The yield was pushed lower after the Fed said it would do whatever to keep the economy moving. Is 2.36% bad? Not if you want income. It will mean higher mortgage rates, but probably not enough to force you to walk away from a real estate deal. If you are a buyer of bonds, however, you aren't happy. The iShares Barclays 20+ Year Treasury Bond (TLT) exchange-traded fund has fallen 11.4% in price since May 1. What you want to watch for is when the price bottoms.
Shares of Caterpillar. Caterpillar (CAT) is the leader in construction-equipment manufacturing. The shares closed down $1.05 to $83.20 on Thursday after a low of $82.35, which came after the open. Caterpillar shares are off nearly 29% from their peak in 2012. About 70% of its revenue comes from outside the United States and that brings worries about flagging growth in China into the picture. Caterpillar gets about 3% of its revenue from China and has hopes to boost that to 6% or more. But that may take more time. In fact sales from Caterpillar's Chinese business fell 45% to $300 million in the first quarter. The HSBC Flash China Manufacturing PMI index fell to 48.3 from 49.2 in May and has fallen for nine straight months. If you see Cat shares moving higher, that may well mean the worst in China is over.
All 10 sectors of the S&P 500 were lower with the losses of 2% or more. The best performing sector was financials, off about 2.1%.
All of the 30 Dow stocks were lower on Thursday. Cisco Systems (CSCO) and Alcoa (AA) were the best performers but were down 25 cents to $24.43 and 10 cents to $8.02, respectively. Walt Disney (DIS), Intel (INTC) and Microsoft (MSFT) were the laggards, down $2.35 to $61.98, 82 cents to $24.19 and $1.10 to $33.49, respectively.
Only 19 S&P 500 stocks were higher, led by Gamestop (GME), Unumprovident (UNM) and Zions Bancorp. (ZION). Homebuilders Pultegroup (PHM), D.R. Horton (DHI) and Lennar (LEN) and gold miner Newmont Mining (NEM) were the laggards.
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Obamas phony economy is beginning to tank. wait until they have to stop printing all that monopoly money, then the sh** will really hit the fan. Nice job Mr. President.
I am in complete aggreement with Somnolence245; however I reserve the right to change the reference of "Uncle Ben" to Uncle Sam" But we all got the message. we have to let these organizations strive OR fail ON THEIR OWN!
GOD SAVE AMERICA !!!!!!!
NO... DON'T die Bank of America... but should you slip and fall and end up in a lot of body casts with parts being dismembered, oh, well, I'll send you a get well card!
I hope the bank leadership landed hard on it's Golden Benefit package! (and lost it!)
We the people should have the right to fire our government officials if they screw up. They are in a position to give themselves raises, line their pockets, have full medical and retirement packages. If you or I screwed up as much as our officials have done, would we still have our jobs?
We've had an incredible ride up. Don't be one of those greedy souls who stick around too long.
Smart money go long now. Pay no attention to the geese farts coming from the dirty, noisy squalor.
We are writing next week's good unemployment figures even as we speak. LOL!
could this be possible??
So, the faux economy built on the back of borrowed/printed money instead of created wealth in the free market is failing?
How did Margaret Thatcher put it so eloquently?
"The problem with socialism is that you eventually run out of other people's money."
This is just another failed social experiment by the struggling Keynesians. It's funny how Bernanke himself stated that quantitative easing doesn't work in 1988 but now, between his $85 billion a month and Japans $80 billion a month infusion, the reality is setting in.
The problem isn’t monetary, it’s fiscal.
Until our government realizes that the problems are of their making and are corrected, we will continue through our jobless recovery, or more appropriately, our “recoveryless recovery”.
Today jobless claims increased. This isn't a stagnant economy, it's mired in the quicksand of government incompetence. When Barrack Hussein and his clueless cabal of economic advisors apologize and admit that government CANNOT create jobs and gets the hell out of the way, the private sector can resume doing what it does the best.
CREATE REAL SUSTAINABLE COMMERCE!
The top 20% of the populace controls 89% of the wealth. Of that amount, the top 0.01% control 37%. The bottom 80% only control 11%. This shift of wealth to the elite has decimated the middle class.
It's no wonder the congress is hesitant to tax the top 2%, since individually they are in this group. Our constitutional republic has evolved into a plutocracy thanks to over four decades of poor governance due to greed and corruption by our elected reps.
In answer to the question, a balance of power.
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As geopolitical tensions threaten to spin out of control, investors are wondering how best to position their portfolios for the global turmoil.
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