The Dow Fell 164 Points Because the Fed Might Taper Soon
Stocks ended the day with moderate losses as the Federal Reserve confirmed expectations in the minutes of its most recent meeting that it was considering taking action to tackle high inflation.
The Dow Jones Industrial Average fell 164.62 points, or 0.48%, to close at 33,896.04. The S&P 500 lost 12.15 points, or 0.29%, to end at 4,115.68, and the Nasdaq Composite slipped 3.9 points, or 0.03%, to close at 13,299.74. The biggest gainer in the S&P 500 was Take-Two Interactive Software (ticker: TTWO), which saw shares rise 7% after the videogame firm beat earnings estimates.
As inflation data roll in, Investors were expecting that the Fed would consider reducing the size of its asset-purchasing program. Inflation—which has already surpassed expectations in the U.S.—rose faster than anticipated in the U.K. There, the producer price index’s input component rose 9.9% year over year for April, trouncing an estimate for a 4.4% rise. But the three major U.S. indexes pared back deep morning losses by the end of the day.
“We expect the stock market to remain volatile over the coming months as the market looks for clarity on inflation,” wrote Richard Saperstein, chief investment officer of Treasury Partners, in remarks to the press emailed ahead of the Fed disclosure.
Right on cue, the Fed said it may consider tapering, or trimming, its asset-purchasing program.
“It might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes read. Less money moving into the bond market would reduce bond prices and lift their yields. The 10-year Treasury yield ended the day at 1.68%, up from 1.66% just before the Fed’s release, and up from 1.62% earlier in the day. Higher bond yields erode the value of future cash flows, putting downward pressure on stock valuations.
Investors have recently dealt with “uncertainty about how long the Fed can continue to hold its policy stance,” Alicia Levine, chief strategist at BNY Mellon Investment Management, told Barron’s.
Growth stocks, including tech and biotech, sold off the last few weeks on rumors of tapering and investors bought growth today on the actual news. Meanwhile, everything else sold off because higher rates also impact mature companies in their earnings prime, represented by value stocks. The Dow, laden with such stocks, saw only five components end the day with gains, and the top three gainers were some of the most stalwart tech names: Salesforce.com (CRM); Microsoft (MSFT); and Intel (INTC).
Jacob Sonenshine
source:barrons.com