Fed sticks with stimulus, but is the market stuck?

The big question is how long will the swoon last. The central bank remains worried that moderate economic growth isn't good enough, while growth world-wide is stallling.

By Charley Blaine May 1, 2013 6:33PM
Trading floor © Digital Vision Ltd./SuperStockStocks opened May with a thud, suffering their biggest losses in about two weeks; that, after economic reports from China and the United States suggested growth is slowing.

Wednesday's declines came despite a Federal Reserve decision to leave its key interest rates alone. That was no surprise. The Fed also said it will continue to buy $85 billion a month in mortgage-backed and Treasury securities -- also no surprise.

The Fed said the economy was growing moderately, but bluntly added federal fiscal policies were holding back the economy.

In the face of all the gloom, decent earnings reports after the close from Facebook (FB), MetLife (MET), Allstate (ALL) and CBS (CBS) won some investor cheers and could give the stock market some support on Thursday. But it could be that the market is going back to give some of its 20%-plus gains since last June.

The Dow Jones industrial Average ($INDU) was off 139 points to 14,701. The Standard & Poor's 500 Index ($INX), which hit a new closing and intranet high on Tuesday, was off 15 points to 1,583, and the Nasdaq Composite Index ($COMPX) was down 30 points to 3,299.
The losses for the major indexes were their worst since April 15, when the Dow fell 266 points. That slump raised fears that stocks were headed into a swoon for the fourth straight year.

There was lots on Wednesday to make investors unhappy with the world. China's official Purchasing Managers Index fell more than expected. Weakening economies have pushed European unemployment to record levels, with suffering the greatest in Greece, Spain, Italy and Portugal.

The Institute for Supply Management said its U.S. manufacturing index slipped, although two forward-looking indicators -- orders and supplier deliveries -- suggested things may percolate higher in the next few months.

Private-sector employers added only 119,000 jobs in April, payroll processor Automatic Data Processing estimated. An original estimate of 156,000 new jobs in March was cut to 131,000.

"Job growth appears to be slowing in response to very significant fiscal headwinds," Mark Zandi, chief economist at Moody's Analytics, which generates the ADP data, said in a statement. "Tax increases and government spending cuts are beginning to hit the job market."

The ADP report is watched closely as a barometer for Friday's big jobs report from the Labor Department. Estimates suggest the government will report a gain of 150,000 or so jobs in April, with the unemployment rate holding at 7.6%.

Which brings us to the Fed, which said it was leaving interest rates at ultra-low levels. The target for the federal funds rate, the rate on loans that the banks make to each other, remains at 0% to 0.25%. The Fed will continue to buy $40 billion a month in mortgage securities and $45 billion in Treasury notes -- to keep interest low and, hopefully, help the economic recovery.

The practical effect is that mortgage rates will remain at 4% or lower for the foreseeable future. Other rates, such as auto-loan rates, also will remain low.

The crummy stock market and the Fed combined to push the 10-year Treasury yield to 1.639% from Tuesday's 1.675%. The yield fell to as low as 1.614%.

The Fed has said clearly it won't start to boost rates until there's substantial improvement in unemployment -- meaning when the unemployment rate falls below 6.5%. And it won't move unless there's a big uptick in inflation. So far, inflation is not a problem.

The Fed probably wasn't the cause for the stock market swoon on Wednesday, although its crack at the rest of official Washington didn't help. The exact phrase in the Fed statement was, "fiscal policy is restraining economic growth." The Fed didn't say if it meant spending cuts required under sequestration or higher income-tax rates for the wealthy and a resumption of a 6.2% Social Security tax rate. Or both. It just said the government isn't helping matters.

The Fed said it is prepared to increase or reduce its bond purchases if "the outlook for the labor market or inflation changes."

For some, this was a big deal, and maybe a signal the Fed would abandon its policy of flooding the economy with cash. But others noted the Fed was prepared to expand its program, too.

But the fact is the stock market has been signalling for several weeks that a pullback was coming, said Hugh Johnson, chairman and chief investment officer at Hugh Johnson Advisors.

How big a pullback is not clear at all. The consensus is around 7% to 10% from current levels. There are others who see deeper declines. "It's too early to reach that conclusion," Johnson says. 

Johnson is more in the 7% to 10% camp. He is less impressed with the idea of a full-fledged crash, because the great unknown before the 2008 crisis was how little most people knew about the vulnerabilities of the financial system.

You could see the worry about markets in the gains for large-cap indexes like the S&P 500 in April, while the small-cap Russell 2000 Index ($RUT) fell back. You can see it in the rise of defensive stocks like utilities. The Dow Jones Utility Average ($UTIL) is up 17.6% for 2013, while the S&P 500 is up 11.1%.

And you see it in commodity prices, which broke in mid-April and were lower on Wednesday. Crude oil (-CL) in New York fell $2.43 to $91.03 a barrel. Gold (-GC) was off $25.90 to $1,446.20 an ounce. Gold ended 2012 at $1,675.80.

The vulnerabilities for now may be that bond prices are in a bubble, Johnson said Wednesday. Prices move higher as rates go lower, and, if there's a big run-up in interest rates, there will be losses. The other worry he has is the rising defaults in student loans.

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22Comments
May 1, 2013 8:12PM
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The Fed’s strategy clearly isn’t working to create jobs or boost the economy. Even scarier, there is no plan B. Well, actually there is, but, it’s a pill only available to women over the age of fifteen. I don’t think the Fed’s strategy is going to survive to that age. Maybe the Fed should just swallow a suicide pill instead.

 

May 1, 2013 6:55PM
May 1, 2013 9:56PM
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so let me get this straight, stimulus after stimulus and more stimulus, or is it stimuli ??...................oh sorry fell asleep there for a sec, after stimulus, God! heard that word soooooooooo many times it's exhausting!! anyway.... the aforementioned 'S' word, all that 'phony' money creating 'phony' stock numbers is called recovery???????????????????? so instead of the private sector expanding, jobs being created by "them" since the gov't DOES NOT CREATE it takes away, and the newly hired people have more cash to invest..... oh this is sooooo tiring, but I'll go on.... they're NOT investing since THEY"RE still OUTTA work!!! can't afford to invest in anything except STAYING financially alive!!

 

so who's winning here?? who's getting......wait for it, .....wait        for      it           here it comes!!! the word the liberal vermin hate sooooo much!!!  RICH!!!!! THE RICH!!!!!

oh!! oh!! I've got the answer!! oh!! oh!!!

 

why it's the very same companies on WALL ST. the libs HATE!! their boy obastard, is giving them HELP!! GE, Bank Of AMerica,etc.. etc.. all his CONTRIBUTORS!! YES!!! 

 

 oh and let's not forget the 8 failed 'green' energy companies which cost zillions of dollars and produced nothing, ain't the gov't funny like that???!!!!

May 1, 2013 7:05PM
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The market will adjust higher for the money printing... 
May 2, 2013 2:50AM
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It's all George Bush's fault,  At least that is what King Obama and the lefties would have you believe.

Tar and feathers, a long lost idea that needs a serious "re-think".

May 2, 2013 11:09AM
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"YES, we can..."  Print our way to prosperity....  So say the Obama cultists...
May 2, 2013 4:46AM
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We can disagree all day long on how this has happened. What you can't disagree to is what has happened. Record profits and cash on hand AGAIN in the first quarter of 2013. Another record quarter of record pay for the CEOs. Meanwhile, a large group of the common folks blame not the Corporations who actually controls who get's elected and whether or not to Pay You a Living Wage.

So yes, we are stuck. We are stuck in a world that in spite of easy access to information, some folks are dumber than ever.

May 1, 2013 11:34PM
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Some of you are being so stimulated you are starting to go blind. Thanks Ben B.

Didn't your mamma's warn you about that?

May 2, 2013 3:21AM
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Charley, your dyslexia is killing me. Please have your editor do his job and review your work before you transmit. Clearly, the problem lays squarely on the shoulders of the GOP. The Republicans, thinking they were smarter than the average bear, allowed 72 million illegals into this country in the hopes they could win their votes through redistricting and through the efforts of speeches given profusely by Jeb Bush's half-hispanic and drug-free son. It didn't work. They voted for Obama. Why is easy; because the GOP Congress refused to allow work permits to tax and monitor the illegals and refused to beef up the border as requested by southwestern states' governors. They also remembered our failed wars in El Salvador, Guatemala, Nicaragua and Honduras that left these areas financially devastated to this day. Reagan lied to Congress about the Iran-Contra affair. Why should hispanics trust the GOP now? Another factor is half of America are Spicolis from Fast Times at Ridgemont High. Nobody wants to do the work to make good grades and succeed anymore so even an exasperated Bill Gates, who thinks Americans are lazy and stupid, wants Congress to fasttrack work visas for people from India, China and Russia to take your jobs. This economy will not improve until the GOP Congress is gone. Period.
May 1, 2013 8:49PM
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Obviously this 'writer' is a bear, he is all gloom and doom inserting many negaticves where trhey don't belong

 

Crummy stock market?

UH it is with in a few hundred points of its all time high

The S&P hit its all time high yesterday (I am sure it gave back some today)

But if that is 'crummy' I would like to know what he says takes to make it okay or even good

 

 

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