February 26, 2024

Stocks and Bonds: Stocks Plunge After Fed Meeting

Stocks steeply declined soon after the Fed announced Wednesday afternoon that it would sell short-term government debt and purchase $400 billion in long-term Treasury securities.

Though the decision helped the bond markets, analysts said the sell-off in stocks showed that investors were unsure that the decision would fully address the economic slowdown.

The announcement was largely in line with the thinking of investors who had been pricing in their expectations that the central bank would shuffle around the composition of its portfolio in a way that would allow businesses and consumers to borrow more cheaply.

Some investors may have been disappointed because there was not some measure that would have significantly contributed to the rise in equity prices, as the previous quantitative easing program did, said David Joy, chief market strategist with Ameriprise Financial.

He described the new measure as a “net wash,” because there was no expansion of the balance sheet.

Investors sold short-term bonds and bought longer-term ones, because they were “trying to buy up something that is going to be in demand, getting in front of the Fed, in essence,” Mr. Joy said.

The Dow Jones industrial average ended down 283.82 points, or 2.5 percent, at 11,124.84, and the Standard Poor’s 500-stock index was down 2.9 percent, or 35.33 points, at 1,166.76. The Nasdaq composite index fell 2 percent, or 52.05 points, to 2,538.19.

The 10-year bond yield fell to 1.86 percent, a new low. That compared with a yield of 1.94 percent late Tuesday. The price on the benchmark note rose 24/32 to 102 14/32.

Another analyst suggested that there were perceptions that the Fed’s move could not get to the root of the problem.

Clark Yingst, the chief market analyst for the investment firm Joseph Gunnar, noted that the declines on Wednesday were in fact preceded by losses in cyclical stocks in previous sessions, like those sensitive to whether the economy was growing or not. Those included stocks in the materials, and industrial sectors related to coal and copper production. The two sectors finished more than 4 percent lower.

Tightening monetary policy in Europe, which is struggling with a sovereign debt crisis, would not help, because it might affect exports.

“This is happening in my view because we are in the midst not only of a U.S. slowdown but a global slowdown,” Mr. Yingst said.

Mr. Yingst said that there could also be some questions about whether the cost of credit was really at the heart of the issue, and that the lower interest rates could take away the incentive for banks to lend, and further squeeze their net interest margins.

“It could backfire,” he said.

 But Lee Quaintance and Paul Brodsky, analysts at QB Asset Management Company, said they thought the move could help banks, in part by improving balance sheets. 

“We think this twist is just the latest permutation of bank aid,” they said in a statement. “Frankly, we cannot remember the Fed doing anything that threatened bank profitability.”

Still, bank stocks as a group fell nearly 5 percent on Wednesday. In addition, Moody’s Investors Service cut its credit ratings on Bank of America, Citigroup and Wells Fargo, saying that Washington was now less likely to bail out the banks if needed. Bank of America fell 7.5 percent to $6.38. Citigroup was down 5.24 percent at $25.52. Wells Fargo was 3.89 percent lower at $23.71. JPMorgan Chase was down 5.92 percent at $30.34.

“Moody’s certainly did not help,” Mr. Yingst added.

Still, some analysts said that the decision was more “aggressive” than the market expected. Anthony Valeri, investment strategist for fixed income with LPL Financial, said that was particularly true with regard to the dollar amount and maturity focus of the Fed’s buying program. “They erred to the aggressive side, I think, because they feel they are the only game in town,” he said.

Binyamin Appelbaum contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=3d7e565e427610b73cdc04f004df6a60

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