Disappointing the investors, U.S. Federal Reserve Chairman Ben Bernanke dropped no hint of another monetary stimulus plan and the subsequently the markets ended in the red zone. However, encouraging economic data, which included Beige Book’s report of the U.S. economy expanding modestly in January and through mid-February, helped limit the losses. Nasdaq breached past 3, 000 mark but failed to sustain that level by the closing bell.
The Dow Jones Industrial Average (DJI) was down 0.1% to settle at 12,938.67. The Standard & Poor 500 (S&P 500) shed 0.3% to finish the day at 1,357.66. The tech-laden Nasdaq Composite index dropped 0.5% to finish yesterday’s trading session at 2,933.17. The fear-gauge CBOE Volatility Index (VIX) gained 2.6% and settled at 18.43. Consolidated volumes on the New York Stock Exchange (NYSE), Amex and the Nasdaq were at is highest level since December 16, 2011, at 8.3 billion shares, higher than February’s daily average of 6.87 billion shares.
All of the benchmarks had opened higher in the initial hours. On Tuesday, the Dow had finished above 13, 000 for the first time since May 2008 and S&P 500 was its highest closing levels since June 2008. While benchmarks looked set to stretch its win to the fifth day, it was the comments from Ben Bernanke that deterred the mood and ended markets’ four-day wining streak. We will come to Bernanke’s comments a little later. Before that, we note that the very day we wrote about Nasdaq approaching the 3,000 mark, the tech-laden index did cross that level, but unfortunately it failed to sustain those gains. Nonetheless, the Nasdaq is dwelling at levels last seen in December 2000 or at the fag-end of the dot-com bubble.
Now coming to Bernanke’s comments, which primarily dragged the markets down, he said the labor market has send “somewhat different signals” than the indicators of final demand. On basis of that he commented: “It will be especially important to evaluate incoming information to assess the underlying pace of economic recovery”. We note, the labor market has shown improving trends since late-December 2011 and the unemployment have dropped to 8.3% versus the usual 9% figure in 2011. Bernanke said, the unemployment rate is expected to trickle lower at a slow pace, he commented that better job market “is likely to require stronger growth in final demand and production”. In the testimony prepared for the House Financial Services Committee, he even called the labor market to be “far from normal”. This was almost an echo to what Bernanke had said in early February s peaking before Congress. That time he commented: hat there is “a long way to go before the labor market can be said to be operating normally”.
Investor sentiment was also bogged won after Bernanke failed investors’ hope of a third round of quantitative easing (QE3) policy. Investors have been hoping for the stimulus measure since a long time now, and they have been disappointed every time. Over the period, Fed’s minutes suggested that the central bank is divided over implementing the third bond-purchase plan, but so far there is nothing concrete to cheer the investors.
Financials bore the brunt and the Financial SPDR Select Sector Fund (XLF) dropped 0.4%. Stocks including Bank of America Corporation (NYSE:BAC), Citigroup, Inc. (NYSE:C), Morgan Stanley (NYSE:MS), Wells Fargo & Company (NYSE:WFC) and American Express Company (NYSE:AXP) dropped 1.7%, 0.5%, 0.9%, 0.3% and 1.6%, respectively.
However, investors’ sentiment were somewhat lifted following the encouraging domestic data. Economic data, including Beige book, Chicago Purchasing Managers Index (PMI) and the U.S. government reporting that US economy expanded faster than initial expectations, helped to limit the losses.
As for the Beige Book, it said: “Reports from the twelve Federal Reserve Districts suggest that overall economic activity continued to increase at a modest to moderate pace in January and early February… Manufacturing continued to expand at a steady pace across the nation, with many Districts reporting increases in new orders, shipments, or production and several Districts indicating gains in capital spending, especially in auto-related industries. Activity in nonfinancial services industries remained stable or increased. Reports of consumer spending were generally positive except for sales of seasonal items, and the sales outlook for the near future was mostly optimistic”.
Investors were also happy to learn that in February business activity rose more than expected and was at the fastest pace in almost a year. The Institute for Supply Management-Chicago Inc reported that the Chicago PMI was up to 64 from 60.2 in January, which was also a 10-month high.
Separately, the U.S. Department of Commerce reported that according to the second estimate the real gross domestic product increased at an annual rate of 3.0% in the fourth quarter of 2011. Initially, the Department of Commerce had estimated a growth rate of 2.8%. AS for the third quarter, the GDP had increased 1.8%.
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