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U.S. Stocks Drop as Fed’s Yellen Outlines Stimulus Exit

March 19, 2014


U.S. stocks fell for the first time in three days as Federal Reserve Chair Janet Yellen said the central bank’s stimulus program could end this fall and benchmark interest rates could rise six months later.

Walt Disney Co., General Electric Co. and Boeing Co. lost at least 1.4 percent to lead the Dow (INDU) Jones Industrial Average lower. Consolidated Edison Inc. led utilities to the biggest decline among 10 groups in the Standard & Poor’s 500 Index. Newmont Mining Corp. lost 3 percent as gold tumbled the most in six weeks after the Fed’s decision to reduce asset purchases.

The S&P 500 slipped 0.6 percent to 1,860.77 at 4 p.m. in New York. The Dow slid 114.02 points, or 0.7 percent, to 16,222.17. About 6.7 billion shares changed hands in the U.S., in line with the three-month average.

“The pace of tightening, once the Fed starts tightening, is a little bit faster than thought before and I think that’s why we’re getting this market reaction,”John Canally, an economic strategist at LPL Financial Corp., said in a phone interview from Boston. His firm oversees about $438.4 billion. “Being reminded that the Fed will eventually raise rates is getting traders’ attention.”

By keeping its benchmark interest-rate target near zero and conducting three rounds of asset purchases, the Fed has helped push the S&P 500 up as much as 178 percent from a 12-year low as U.S. equities enter the sixth year of a bull market that started in March 2009.

Higher Rates

Stocks turned lower today as the Fed’s statement said officials predicted their target interest rate would be 1 percent at the end of 2015 and 2.25 percent a year later, higher than previously forecast, as they upgraded projections for gains in the labor market. The central bank said it would trim its monthly bond purchases by $10 billion, to $55 billion.

Most Federal Open Market Committee participants reiterated their view that the Fed will refrain from raising the benchmark interest rate until 2015. The median rate among 16 Fed officials rose from December, when they estimated the rate at the end of next year at 0.75 percent, and 1.75 percent for the end of 2016. The central bank said it will look at a wide range of data in determining when to raise its rate, dropping a pledge tying borrowing costs to a 6.5 percent unemployment rate.

Benchmark indexes extended losses as Yellen said the quantitative easing program would end this fall if the Fed continues to taper purchases in measured steps. She sees a “considerable time” between the end of the stimulus and the first rate increase, meaning  “six months or that type of thing,” she said at her first press conference following a Fed decision.

‘Risk Factor’

“U.S. indices are moving quickly on Yellen’s comments,” Larry Peruzzi, senior equity trader at Cabrerra Capital Markets LLC in Boston, said in an e-mail. “Equities are adjusting the risk factor of higher rates.”

The Chicago Board Options Exchange Volatility Index (VIX), a gauge for U.S. stock volatility, jumped 4.1 percent to 15.12 after two straight losses. All of the 10 main industries in the S&P 500 retreated with utility and industrial shares losing at least 1 percent for the biggest declines. Financial companies slipped less than 0.2 percent for the best performance.

Disney lost 1.8 percent to $80.52, Boeing slid 1.5 percent to $122.24 and GE declined 1.4 percent to $25.28 as 25 of 30 stocks in the Dow declined.

Newmont Mining slid 3 percent to $24.50 for a third straight decline. Gold for immediate delivery slumped 1.9 percent to $1,330.35 an ounce as the Fed predictions for higher interest rates next year curbed demand for the metal as a store of value.

Con Ed

All 30 utilities in the S&P 500 retreated as Treasury 10-year yields jumped 10 basis points to 2.77 percent, competing with the dividend yields offered by utilities. Con Ed dropped 3.2 percent to $52.68 and Duke Energy Corp. fell 2.2 percent to $68.71.

SolarCity Corp. dropped 5.7 percent to $72.70. The biggest U.S. solar-power supplier by market value posted fourth-quarter net income of $26.7 million, compared with a loss of $33 million a year earlier. The profit came largely from an acquisition-related tax benefit, the company said. Excluding one-time items, SolarCity had a loss of 46 cents a share.


Nu Skin Enterprises Inc. (NUS) lost 5.8 percent to $72.22. The skin-care product seller suspended some promotional meetings in China and won’t accept new applications for sales jobs there. The company is being investigated after a report in People’s Daily newspaper said it’s a “suspected illegal pyramid scheme.”

Juniper Gains

Juniper Networks Inc. gained 2.1 percent to $26.45 after Wells Fargo Securities analyst Jess Lubert raised the company’s rating to outperform from market perform.

The S&P 500 advanced 1.7 percent in the last two days as Russia pledged not to seek territory beyond Crimea. The U.S. and Europe are preparing to ratchet up sanctions on Russia after President Vladimir Putin signed an accord setting in motion Crimea’s accession to Russia. With visa bans and asset freezes on Russian officials failing to sway Putin, European Union leaders will meet tomorrow to consider “additional and far-reaching consequences.”

Investors have added $8 billion to U.S. equity exchange-traded funds in the past five days and $1.1 billion to bond ETFs, data compiled by Bloomberg show. Materials stocks absorbed the most money among industry ETFs, taking in $689 million during the past week.

CREDIT TO:  Callie Bost / Lynn Thomasson / Bloomberg



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