Stocks Plunge on Fears of World Without Fed Stimulus
NEW YORK ( TheStreet) -- U.S. stock markets plunged the most in 19 months Thursday on fears the Federal Reserve plans to reduce the bond-buying that has fueled equity markets for more than a year and kept mortgage rates at historic lows.
The S&P 500 dropped 2.5% to close at 1,588.19 as homebuilder stocks posted the biggest percentage losses in the index.
The largest drop in equity prices since November 2011 comes as Fed Chairman Ben Bernanke indicated Wednesday that the central bank is studying plans to begin curbing the stimulus measures known as "quantitative easing" that have helped stabilize the economy following the recession of 2009.
"All of these asset classes that have benefited so much from QE are having to be repriced downward to reflect the accelerated timeline for tapering,'' said Alec Young, global equity strategist at S&P Capital IQ in a New York interview. "If the rise in interest rates that we are seeing right now slows the economy too much, the irony may be that the very tapering that investors are pricing in doesn't happen because investors have driven up bond yields so high that it chokes off the recovery."
The downturn Thursday was compounded by higher-than-expected jobless claims for the week ended June 15 and a smaller-than-expected rise in the Conference Board's Index of Leading Indicators for May. Meanwhile. markets shrugged off a better-than-expected report on May existing home sales and the Philadelphia Fed's Business Outlook Survey for June.
"The possibilities of the Fed trimming in the later part of the fourth quarter of this year is a given factor, and I suspect the markets are now adjusting to life without stimulants, which is creating an overreaction in the markets," Peter Cardillo, chief market economist at Rockwell Global Capital in Manhattan, said in an email. With the withdrawing, "the expansion in the housing sector is likely to continue, but at a slower pace as mortgage rates increase," he added.
The benchmark 10-year Treasury dove by 13/32, pushing the yield up to 2.42%.
The Labor Department reported Thursday that initial jobless claims increased by 18,000 to a higher-than-expected 354,000 in the week ended June 15. Economists were predicting a rise to 340,000. The four-week moving average on initial claims also rose, up 2,500 to 348,250.
The Federal Open Market Committee voted to maintain its current policy of buying $85 billion per month by a vote of 10 in favor and 2 against but outlined criteria which will determine when the bank begins to reduce the size and scope of its bond buying program. The Fed noted that its U.S. growth outlook has improved and suggested that it could begin winding down stimulus measures as early as this year.