Fed Discourages Investors

On Wall Street, the S&P 500 index recorded its largest daily drop in the last three months on Wednesday, as investors were discouraged by the possibility that the U.S. central bank might reduce or completely eliminate its bond-buying program.

The Dow Jones fell by 108 points, or 0.77 percent, to 13,927 points, while the S&P 500 plummeted 1.24 percent to 1,511 points, and the Nasdaq index dropped 1.53 percent to 3,164 points.

The largest daily drop in the S&P 500 index since November last year was a result of the release of the minutes from the recent Fed meeting, which showed that some leaders of the U.S. central bank are concerned about the costs of purchasing government and mortgage bonds, and may reduce or completely eliminate this program, known as quantitative easing.

“Investors would like quantitative easing to continue until the economy fully recovers, so signals that this program could be terminated sooner than expected have created uncertainty in the market,” says Todd Schoenberger, a partner at LandColt Capital.

The Fed introduced quantitative easing monetary policy in 2008 to combat the financial crisis and pull the economy out of recession. This has fueled stock price growth as the bond-buying program increases the central bank’s balance sheets and injects fresh money into financial markets, leading to lower interest rates and encouraging lending.

Last year, the Fed indicated that it would continue this program until the unemployment rate significantly decreases, but it seems that there are increasing opponents within the central bank against the continuous printing of fresh money.

The uncertainty in the market caused by the potential withdrawal of this program is evidenced by yesterday’s jump in the VIX ‘fear’ index of the Chicago Board Options Exchange by more than 19 percent, marking its largest daily jump since November 2011.

In addition to intensifying their portfolio protections against possible further declines in stock prices, many investors are hastily withdrawing from the market, as indicated by the increased daily trading volume.

On Wall Street, NYSE MKT, and Nasdaq, 7.5 billion shares changed hands yesterday, marking the second-largest daily volume this year.

The ratio of shares that lost value to those that gained was 3 to 1.

The biggest declines in stock prices were in the construction sector, following weak quarterly results from Toll Brothers, one of the largest U.S. construction companies, and data showing a drop in the number of housing starts in the U.S. in January. The Dow Jones construction sector index fell by 6.7 percent.

The energy sector, on the other hand, weakened by 2.1 percent, due to a drop in oil prices of more than 2 percent and weaker-than-expected results from several smaller oil companies.

Rumors about problems with a hedge fund also negatively impacted the market.

“I have heard stories that one hedge fund is liquidating assets. Although it seems that these rumors are unfounded for now, they have caused additional uncertainty in the market,” says Schoenberger.

Investors have been uncertain for days as, after a strong rise in recent months, stock prices have reached their highest levels in over five years.

Since the beginning of the year, the S&P 500 index has risen about 6 percent, bringing it within approximately 3 percent of its record level. The Dow Jones is only about 1.5 percent away from its highest level in history, reached in 2007.

Many analysts expect a correction in stock prices downward as they question whether the not-so-impressive corporate earnings and slow economic growth support such high price levels.

On most European exchanges, stock prices also fell yesterday. The Frankfurt DAX index weakened by 0.30 percent to 7,728 points, while the Paris CAC fell by 0.69 percent to 3,709 points. The London FTSE, on the other hand, strengthened by 0.26 percent to 6,395 points.