After the minutes of the Federal Reserve Open Market Committee sounded a cautious note regarding the hiring scenario, investor sentiment dampened, dragging the markets down yesterday. Additionally, the house was divided over easy monetary policy, thus washing out chances of a third round of quantitative easing (QE3) anytime soon.
The Dow Jones Industrial Average (DJI) plunged 0.5% and closed the day at 13,199.55. The Standard & Poor 500 (S&P 500) lost 0.4% and finished yesterday’s trading session at 1,413.38. The tech-laden Nasdaq Composite Index edged down 0.2% to end at 3,113.57. The fear-gauge CBOE Volatility Index (VIX) gained 0.1% and settled at 15.66. Consolidated volumes on the New York Stock Exchange, the American Stock Exchange and Nasdaq were roughly 6.75 billion shares, lower than last year’s daily average of 7.84 billion. For 63% of the declining stocks, around 33% of the stocks managed to move higher. The remaining 4% stocks were left unchanged.
Over the past four trading sessions, including yesterday, the VIX had been trending up. The gains on these four days have not been anything robust and ranged from a low of 0.06% to a high of 0.9%. The five-day change in this index is a positive 0.5%, reflecting inflated fears among investors over these past few days. However, the fear-gauge index is significantly below the highs it had soared to last year and is even sharply lower than the levels it started the year with. Year-to-date the index is down 33.1% and is down 27.1% over the past three months. Recessionary fears have eased a good deal and economic reports have proved to be encouraging on most occasions since late-December 2011. Thus, with brighter prospects, fears have declined as investors grow more hopeful about the economy.
However, yesterday the Fed minutes suggested that the policy makers were cautious about the hiring environment. The minutes noted: “While recent employment data had been encouraging, a number of members perceived a non-negligible risk that improvements in employment could diminish as the year progressed, as had occurred in 2010 and 2011, and saw this risk as reinforcing the case for leaving the forward guidance unchanged at this meeting”. Fed members were worried that the hiring rate may show a downturn unless there is economic improvement. Separately, policy makers reiterated they would leave the short-term interest rates at low levels until late 2014.
Investors have always hoped for the third round of bond buyback plan, but their hopes have been dashed every time. The house was divided, rather only a handful of members supported QE3, and the minutes clearly negated chances of this occurring anytime soon. The minutes stated that “no decisions on this topic were planned for this meeting and none were taken”.
These concerns were reflected by the financial sector and the Financial Select Sector SPDR (XLF) dropped 0.6% yesterday. Financial bellwethers including Bank of America Corporation (NYSE:BAC), Citigroup, Inc. (NYSE:C), Morgan Stanley (NYSE:MS), The Goldman Sachs Group, Inc. (NYSE:GS), UBS AG (NYSE:UBS) and JPMorgan Chase & Co. (NYSE:JPM) dropped 2.0%, 1.4%, 2.2%, 1.8%, 2.9% and 0.9%, respectively.
Economic data from the Department of Commerce came in strong yesterday. But, with these concerns overshadowing other developments yesterday, a rebound in new orders for manufactured goods in February failed to spark a broader rally. The U.S. Department of Commerce reported that new orders for manufactured goods rose $6.0 billion or 1.3% in February to $468.4 billion, in stark contrast to the 1.1% drop in January.
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