The Markets
After the Federal Reserve laid out its blueprint for tapering off its economic support, financial markets promptly went into what was quickly dubbed a "taper tantrum." The Dow followed a 206-point loss the afternoon of the Fed announcement with a 354-point drop the next day, its worst loss of the year. The S&P 500 is now down 4.6% from the record high set on May 21, while the Dow and Nasdaq are down 3.9% and 4.1% respectively in the same time. However, the small caps of the Russell 2000 actually managed to close a point above May's high before joining the other indices in the post-Fed retreat. The Global Dow took the worst beating, hurt not only by Fed anxiety but by concerns about liquidity problems and weaker manufacturing reports in China as well as renewed worries about aid for Greece. Combined with the quadruple witching options expiration at week's end, it all made for a perfect storm for financial markets.
Investors who had poured money into bonds in recent years continued to reverse that trend. The 10-year Treasury yield soared almost four-tenths of a percentage point last week alone, topping 2.5% for the first time since August 2011, and bond prices generally fell sharply across the board, since bond prices tend to move in the opposite direction from yields. Gold, which has been suffering for months because of a stronger dollar, plunged roughly $80 an ounce after the Fed announcement, ending at just under $1,300.
Last Week's Headlines
- The Federal Open Market Committee (FOMC) outlined a tentative game plan for reducing the economic support it has provided over the last few years. Assuming the current moderate economic expansion continues, the Fed may begin cutting back on its $85 billion a month worth of bond purchases by the end of the year and could end them entirely in 2014. Once the unemployment rate falls to around 6.5%, it will consider raising the target Fed funds interest rate above 0.25% for the first time in more than four years. The announcement raised investor concerns about whether the global economy would wobble once the training wheels known as quantitative easing are removed.
- Home resales were up 4.2% in May, according to the National Association of Realtors®, and were almost 13% higher than in May 2012. Low inventories continued to constrain sales and helped send the median resale price to its 15th straight month of year-over-year increases.
- The Federal Reserve's Empire State manufacturing index showed modest improvement, and the Philly Fed manufacturing index hit its highest level in more than two years. However, HSBC's survey of Chinese purchasing managers showed manufacturing there at its lowest level in nine months.
- Consumer prices went up 0.1% in May, driven primarily by housing costs, according to the Bureau of Labor Statistics. That put the consumer inflation rate for the last year at 1.4%.
- Housing starts increased 6.8% in May, and the Commerce Department said they were 28.6% higher than a year earlier. Residential building permits--an indicator of future construction activity--fell 3.1% during the month but were almost 21% higher than last May.
- The Conference Board's index of leading economic indicators rose 0.1% in May, though at a slower pace than the month before. Three of the index's 10 indicators--stock prices, credit availability, and the interest-rate spread--were responsible for the increase.
- China's central bank injected additional cash into the financial system there to ease concerns about liquidity between banks and bring down money market interest rates that had hit records.
- A meeting of European Union finance ministers to set rules for dealing with failing banks was dominated by reports that the International Monetary Fund's aid payments to Greece could be in jeopardy later this summer because of a shortfall in funding for the aid package.
Eye on the Week Ahead
As the second quarter comes to a close, a number of Federal Reserve governors or board members are scheduled to make speeches that could elaborate on last week's Fed announcement. Housing data also is on tap, but investors may continue to focus on central banks around the globe and particularly in China.
Key dates and data releases: Dallas Fed manufacturing survey (6/24); durable goods orders, home prices, new home sales (6/25); final Q1 GDP figure (6/26); personal income/spending (6/27).
Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.
