Wall Street sells off after Fed sticks with stimulus cuts

NEW YORK Wed Jan 29, 2014 5:43pm EST

1 of 3. Traders work on the floor of the New York Stock Exchange January 24, 2014.

Credit: Reuters/Brendan McDermid

NEW YORK (Reuters) - U.S. stocks dropped more than 1 percent on Wednesday, hitting session lows after the Federal Reserve stuck with its plan to scale back stimulus even in the midst of emerging market turmoil.

With the day's decline, the S&P 500 is down 4 percent for the month - its worst monthly loss since May 2012. Some investors have been bracing for a correction, given the S&P 500's gain of 30 percent last year.

Trading was volatile after the Fed's move, which further reduces its monthly bond purchases by $10 billion a month. Declines were fairly broad-based, with nine of the 10 S&P 500 sector indexes ending lower. Shares of Boeing Co (BA.N) ranked among the biggest drags on both the Dow and the S&P 500.

Overall improvement in the U.S. economy suggested the central bank would continue to cut the purchases, but some investors had speculated in recent days that the Fed might rethink its plan because of the emerging market problems.

"I think investors had hoped that the Fed would somehow respond to the recent turbulence and show they had their back," said Jack Ablin, chief investment officer of BMO Private Bank in Chicago.

But the Fed really wants "to move to the sidelines here and get out of the QE business."

In its announcement, the Fed said it would buy $65 billion in bonds per month starting in February, down from $75 billion now. In what was Fed Chairman Ben Bernanke's last policy-setting meeting, the central bank also maintained its longer-term plan to keep U.S. interest rates low for some time to come.

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The benchmark S&P 500 has lost ground in four of the past five sessions as fears over slowing growth in China and large capital outflows from developing markets prompted investors to seek safe-haven assets.

The Dow Jones industrial average .DJI fell 189.77 points or 1.19 percent, to end at 15,738.79. The S&P 500 .SPX lost 18.30 points or 1.02 percent, to finish at 1,774.20. The Nasdaq Composite .IXIC dropped 46.53 points or 1.14 percent, to close at 4,051.43.

The CBOE Volatility Index .VIX or VIX, Wall Street's barometer of fear, jumped 9.81 percent to end at 17.35.

The Fed's quantitative easing program has supported not just the U.S. economy but overseas economies as well by increasing liquidity, so cutting the stimulus has been a big factor in the emerging markets' selloff.

Stocks were lower early in the session even after bold efforts by Turkey and South Africa to stabilize their currencies.

South Africa's central bank raised interest rates for the first time in six years. Its move followed a dramatic rate hike by Turkey's central bank late Tuesday, designed to defend its crumbling currency.

Boeing's stock fell 5.3 percent to close at $129.78, after the aerospace and defense company issued conservative forecasts for profit and cash flow. Investors focused on those projections, though the company reported a surge in quarterly profit.

Yahoo (YHOO.O) shares dropped 8.7 percent to end at $34.89, a day after the Internet company reported a drop in online ad prices that hurt its revenue for a fourth consecutive quarter.

Among other profit reports, Dow Chemical Co (DOW.N) posted a quarterly profit that was well ahead of expectations. It also raised its dividend 15 percent and expanded its stock-buyback program. Dow Chemical's stock rose 3.9 percent to end at $44.73.

After the bell, shares of Facebook (FB.O) rose 9.2 percent to $58.45 after the world's largest social networking company reported quarterly revenue increased 63 percent. <ID:L2N0L3017>

Quarterly earnings expectations for the S&P 500 have improved as more companies have reported results. Growth is now estimated at 9 percent, compared with 7.6 percent at the start of the month, Thomson Reuters data showed.

As the stock market rallied last year, valuations rose for S&P 500 companies. The forward price-to-earnings ratio is at 14.9, compared with 13.1 at the start of 2013.

Volume was higher than average for the month. About 7.5 billion shares changed hands on U.S. exchanges, compared with the average of 6.8 billion so far this month, according to data from BATS Global Markets.

Decliners outnumbered advancers on the New York Stock Exchange and the Nasdaq by slightly more than 3 to 1.

(Reporting by Caroline Valetkevitch; Additional reporting by Steven Johnson; Editing by Bernadette Baum, Nick Zieminski and Jan Paschal)

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Comments (8)
bertanderson wrote:
Do any of the business experts for Reuters have any comments on a solution to this? It seems like QE tapering is inevitable. Therefore, this will lead to money being pulled out of emerging markets and currencies collapsing. To slow down the exodus of money, interest rates will need to go up but this isn’t sustainable and if it goes on for too long it will have devastating effects on countries and the global economy.

Jan 29, 2014 11:58am EST  --  Report as abuse
bertanderson wrote:
It will be interesting to see if the technical floors mean anything when we have a difficult global crisis. I would like to hear someone’s opinion on a solution. It we are going down this road, I only see market downside. Should I be selling?

Jan 29, 2014 12:43pm EST  --  Report as abuse
bertanderson wrote:
Any comments on how to prevent the collapsing emerging market currencies due to Fed tapering. Why wasn’t the exodus from emerging markets anticipating? We had the best economic PhD’s (Professor Bernanke et al) proposing the QE strategy. I know the approach had been proven before and focused on what was good for the US which it did, but the global ramifications maybe significant and the fall out will come back to North America markets.

Jan 29, 2014 2:27pm EST  --  Report as abuse
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