U.S. stocks dropped moderately, reversing earlier gains in the final hour of trading as concern grew that efforts to lift the economy out of stagnation will be withdrawn prematurely. Stocks got some boost following the central bank’s widely-expected decision to hold interest rates steady but the rally faded soon after as traders found few surprising revelations in the Fed statement.
Although the Fed, in its policy statement, contended that it would continue to employ a wide range of tools to stimulate the economy, investors saw little reason to rejoice, wondering if the stocks were too expensive at current levels. The Fed reiterated that it will slow its purchase of mortgage-backed securities, signaling its confidence that an economic recovery is indeed underway. However, there was no talk of exit strategy methods and timetables. Nevertheless, the FOMC minutes, released at 2:15 ET, maintained the Fed’s intentions to keep “exceptionally low levels of the fed funds rates for an extended period.”
Fed’s decision to hold interest rates steady helped the greenback maintain its recent momentum but the government’s auction of $40 billion in 5-year notes Wednesday failed to elicit an upbeat response, after Tuesday’s sale of $43 billion in 2-year notes witnessed strong demand.
The Dow Jones industrial average fell 81.32 points, or 0.8%, to close at 9,748.55. The broader Standard & Poor’s 500-stock index lost 10.79 points, or 1%, to end at 1,060.87, while the Nasdaq composite index retreated 14.88 points, or 0.7%, to 2,131.42. On the New York Stock Exchange, 1.32 billion shares exchanged hands and advancing shares outpaced those that declined three to two.
A surprising rise in crude stockpiles and a higher-than-anticipated yield on the Treasury’s $40 billion auction of 5-year notes combined to generate a widely-expected but moderate pullback. Today’s markets are expected to take a cue from the existing home sales report along with the G-20 meet before deciding on a future course of action. Moreover, this morning the US took another swipe at China trade practices, alleging China has improperly subsidized some types of coated paper.
Meanwhile, the weekly EIA report showed a surprising 2.8 million barrel build in crude inventories. The Street was expecting a 2.25 million barrel fall. The unexpected build hurt basic material and oil and gas shares. Basic material shares, up 51.2% year-to-date, were the leading decliners on the S&P500, off 2.3%. Oil and gas shares fell 1.9%. Exxon (NYSE:XOM) declined 1.2% to $69, while Chevron (NYSE:CVX) retreated 1.7% to $71.37. Newmont Mining Corp., (NYSE:NEM) the largest U.S. gold producer, lost 3.6% to $43.59. Freeport-McMoRan (NYSE:FCX) the world’s largest publicly traded copper producer fell 2.8% to $71.09.
On the DJIA twenty-five of its thirty components closed down; on the S&P500 only five stocks finished higher. Financial shares were also hit hard, with declines of 2.0%, as investors grew concerned over prospects for an eventual unwinding of the Fed’s cheap money policy. Consumer services traded down 1.4%; health care 1.1%; and industrials 1.0%. Only telecommunications shares managed gains, moving 1.5% higher on the day; year-to-date, however, the group is the only sector to remain in negative territory on the year, with a 2.0% drop.
The 2:15 ET release of the FOMC minutes failed to elicit much of a response. Fed Chairman Bernanke had already spread the word of the recession’s end, so the language change suggesting economic activity has now “picked up,” and is no longer “leveling out” seemed old news, along with notes that “conditions in financial markets have improved further, and activity in the housing sector has increased.”
