Investor sentiment plunged after Federal Reserve Chairman Ben Bernanke hinted that monetary stimulus would be decreased by the end of the year, sending major indices sharply lower. The S&P 500 logged its biggest drop in more than one and half years. A series of domestic reports were released yesterday. The number of Americans filing for unemployment benefits increased in the previous week. Existing home sales surged in May to its highest level in more than three years. Despite encouraging reports, housing stocks took a hammering. All ten sectors of the S&P 500, ended in the red.
The Dow Jones Industrial Average (:DJI) plunged 2.3% to close the day at 14,758.32. The S&P 500 nosedived 2.5% to finish yesterday’s trading session at 1,588.19. The tech-laden Nasdaq Composite Index fell 2.3% to end at 3,364.64. The fear-gauge CBOE Volatility Index (:VIX) rocketed 23.1% to settle at 20.49. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and Nasdaq were roughly 9.29 billion shares, considerably higher than the 2013’s average of 6.36 billion shares. Declining stocks outnumbered the advancers. For the 91% that declined, only 9% advanced.
The Fed’s bond buying program has acted as a catalyst to the markets, lifting major indices higher this year. But following Bernanke’s testimony on May 22 markets dipped on fears that Fed might taper the bond buying program sooner than expected. Markets fell sharply on Wednesday and Thursday after Bernanke made it clear that the Fed may slow down its bond buying program later this year. Bond purchases may end completely by mid-2014, if the economy shows further resilience. Global markets have witnessed significant correction following Bernanke’s statements.
Meanwhile, initial claims for the week ending June 15, increased 18,000 to 354,000 from the prior week’s revised figure of 336,000. This was contrary to the consensus estimate of a decline to 333,000. The four week moving average increased 2,500 to 348,250 from the previous week’s revised figure of 345,750. On Wednesday Federal Reserve provided an encouraging outlook for the job market. The Fed expects the employment scenario to improve and the unemployment rate to fall to a figure between 6.5% and 6.8% by the end of 2014. This is better than what the forecast released in March, which was a figure between 6.7% and 7%.
Discouraging economic numbers from China added to investor woes. China’s factory output declined to a nine month low in June. HSBC Bank’s preliminary PMI reading came in at 48.3 in June from May’s final figure of 49.2. A fall in China’s factory activity indicates that the slowdown in the second quarter could be more than previously estimated. HSBC chief economist Qu Hongbin said: “Manufacturing sectors are weighed down by deteriorating external demand, moderating domestic demand and rising destocking pressures.”
On the encouraging side, the National Association of Realtors reported that existing home sales increased in May. According to the report, existing home sales jumped to 5.18 million in May from April’s figure of 4.97 million. This was above the consensus estimate of 5.01 million. Existing home sales climbed to its highest level in three and half years. NAR chief economist Lawrence Yun said: “The housing numbers are overwhelmingly positive. However, the number of available homes is unlikely to grow, despite a nice gain in May, unless new home construction ramps up quickly by an additional 50 percent.”
Despite encouraging reports, housing stocks declined following worries about higher borrowing rates. The SPDR S&P Homebuilders (XHB) plunged 4.8%. Stocks such as Toll Brothers Inc (NYSE:TOL), KB Home (NYSE:KBH), D.R. Horton, Inc. (NYSE:DHI), The Ryland Group, Inc. (NYSE:RYL) and PulteGroup, Inc. (NYSE:PHM) fell 4.4%, 6.6%, 9.1%, 10.1% and 9.1%, respectively.
Meanwhile, the Federal Reserve Bank of Philadelphia’s general economic index, which covers eastern Pennsylvania, southern New Jersey and Delaware unexpectedly climbed to 12.5 in June from May’s figure of -5.2. This was well above consensus estimate of -0.6. Growth in manufacturing activity in the Philadelphia region in June was at its fastest rate in two years.
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