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Dose of reality from Fed jolts markets after long upward run
Question of the Day
Wall Street suffered through its worst day of the year Thursday, bringing investors down from the "sugar high" they have enjoyed this year as the markets topped milestone after milestone.
The Dow Jones industrial average plummeted for the second consecutive day Thursday, at one point tumbling by more than 360 points, or nearly 2.4 percent, to close at 14,758.32, one day after the Federal Reserve hinted that it may soon tighten the monetary spigot. Disappointing news on China's latest manufacturing statistics contributed to trader pessimism, as well.
A day earlier, the Dow dropped more than 200 points, or 1.3 percent — making the total from Wednesday and Thursday about 560 points, or just shy of 4 percent.
The broader S&P 500 index, meanwhile, tumbled below the 1,600 mark, closing at 1,588.19, down more than 40 points, or 2.5 percent on the day, while the tech-heavy Nasdaq fell more than 78 points, or 2 percent, to 3,364.64.
Federal Reserve Chairman Ben S. Bernanke on Wednesday suggested that the Fed may start winding down its stimulus program because the markets are strong enough that they no longer need the government's help.
The Fed has been spending $85 billion each month, investing in Treasurys and U.S. equities to keep the economy afloat. And it has worked. The unemployment rate has shrunk to 7.6 percent from 8.1 percent when the buying program started in September.
Greg McBride, senior financial analyst at Bankrate.com, said this has fueled the record run on Wall Street.
"It just goes to show that the market has been on a sugar high from Fed stimulus and reality is beginning to set in," said Greg McBride, senior financial analyst at Bankrate.com.
Paul Edelstein, U.S. economist at IHS, agreed that the Fed is responsible for Wall Street's success this year. "But it's predicated on the Fed staying the course until things get better on their own," he said.
The Fed expects the unemployment rate to continue to decline to about 7.2 percent by the end of the year, which would justify pulling back — but neither Mr. Edelstein nor Mr. McBride thinks this will happen.
Unemployment is still high at 7.6 percent, household income is stagnant, and revenue growth is hard to come by for companies, Mr. McBride said.
"This is not an economy that's hitting the cover off the baseball by any means," he said. "Those are not the type of market fundamentals that would justify a market that's up double digits year to date."
So without the Fed's backing, the markets are bound to take a tumble, analysts say.
"I think the Fed has been very supportive of the economy," Mr. Edelstein said. "One of the reasons that the economy has done so well this year is because of the Fed's support. So if the Fed withdraws that support, I become much less optimistic."
Investors received further bad news from China, the world's second-largest economy, where the manufacturing sector may have contracted in June, according to a report.
HSBC's monthly purchasing managers' index dropped to a reading of 48.3, down from 49.6 in May. That's a nine-month low, and any number less than 50 indicates a contraction in the industry.
But Mr. Edelstein said China's struggles won't affect the U.S. as much as the Fed's plans could.
"Everyone is worried that a slowdown in China will affect the rest of the world, particularly in the U.S.," he said. "My view is that the slowdown in the U.S. and Europe will impact China — that's what we're seeing now."
It might have been a bad a couple of days for Wall Street, but it could be worse. On Sept. 29, 2008, during the height of the Great Recession, the Dow lost 777 points in one day, which is the biggest total in the history of the index.
During one week in August 2011, the Dow lost more than 1,600 points. The index fell 512.76 on Aug. 4, 634.76 on Aug. 8, and 519.83 on Aug. 10.
Despite the recent fall, the U.S. markets remain up strongly for the year to date.
Before the Fed's announcement Wednesday, Wall Street was up about 15 percent from the beginning of the year. The Dow was trading nearly 17 percent higher than where it started in January, and the S&P was up nearly 16 percent from that point. The Nasdaq was up more than 12 percent.
The markets have hit numerous milestones this year.
The Dow started the year at 13,104.30, and it took only a month for the benchmark index to hit the 14,000 mark on Feb. 1, a milestone that quickly became old news as records continued to fall.
On May 3, the Dow broke through the 15,000 mark before closing at 14,973.96. Four days later, it closed above the plateau for the first time at 15,056.20. Since then, it has closed below that mark only three times, including Thursday.
On May 22, it reached the all-time high of 15,542.40.
The S&P also has had a record year. The broad index started the year at 1,462.42 and hit the 1,500 mark later that month.
On Jan. 24, it touched 1,502.27 before closing lower. The next day, it closed at 1,502.96 for the first time.
On May 3, it closed at 1,614.42 for the first time, reached the all-time high of 1,687.18 on May 22 and didn't fall below 1,600 until Thursday.
So the markets may have some correcting to do, analysts say.
"Even healthy markets go through corrections," Mr. McBride said, "and we're not even in correction territory yet."
© Copyright 2014 The Washington Times, LLC. Click here for reprint permission.
About the Author
Tim Devaney is a national reporter who covers business and international trade for The Washington Times. Previously, he worked for the Detroit News, Grand Rapids Press, Portland Press Herald and Bangor Daily News. Tim can be reached at firstname.lastname@example.org.
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