Investors were itching to sell stock last week, and they found just enough reasons to pull the trigger.
Nothing terrible happened in the markets or the economy, and yet stocks fell more than they have in 14 months. In fact, it wouldn’t have been that surprising if stocks had risen this week: The government released strong data on jobs and solid housing numbers. But increased fears of Fed tapering and weak reports from retailers helped spur selling momentum.
For the week the Dow fell 344.04 points, or 2.23%, to 15,081.47. The Standard & Poor’s 500 fell 35.59 points to close at 1655.83, and the Nasdaq Composite dropped 57.33 points, or 1.57%, to close at 3602.78.
Treasury notes slumped, with the 10-year yield rising 0.246 percentage point to 2.827%, its largest jump since June.
How quiet was the news cycle this week? Some of the hottest chatter came out of Paducah, Ky., population 25,024. James Bullard, president of the St. Louis Fed and a voting member of the FOMC, said in a speech there on Wednesday that he was “concerned about low inflation.” He added that he hasn’t come to a conclusion on the taper and that a reduction in bond purchases could start very slowly, if at all; stocks fell nonetheless.
The selling accelerated on Thursday, as earnings reports from Wal-Mart Stores (ticker: WMT) and Cisco Systems (CSCO) both disappointed the Street. Also on Thursday, the government said that jobless claims fell to 320,000, and the four-week average fell to its lowest level since November 2007. Apparently, investors remain in “good is bad” mode, seeing positive economic news as a harbinger for a less-accommodative Fed policy. Real estate also presented a conundrum: Housing stocks spiked on solid housing-starts numbers, but real-estate investment trusts fell. Investors are likely weighing whether they should take a risk on REITs when Treasuries are starting to offer stronger returns.
Given the improvement in the labor market, the Fed’s plan to taper bond purchases does look more certain, said Brad McMillan, chief investment officer at Commonwealth Financial Network. As the market comes to grips with the plan, the S&P could give up about 5% to 6% from its peak, as much as it did in the last taper-induced selloff, McMillan predicted. The S&P 500 is now down about 3% from the peak.
“The notion of the Fed starting to taper after the September meeting is becoming pretty well founded,” he said (Source: Barrons Online).