The Free Press, Mankato, MN

June 4, 2013

Stocks are hit by central-bank worries

MarketWatch
The Mankato Free Press

---- — NEW YORK — U.S. stocks fell, derailing a long-running Tuesday winning streak for the Dow industrials, as Wall Street remained on alert for clues as to central-bank policy moves ahead.

“The past few weeks have been all about whether the taper is going to occur or not, and what that means,” Nick Raich, CEO of the Earnings Scout, said of the heightened volatility that has come with uncertainty as to whether the Federal Reserve would curb its $85 billion in monthly bond purchases sooner than anticipated.

On Tuesday afternoon, Fed Bank of Kansas City President Esther George cancelled a speech slated to be delivered in New Mexico, but her prepared remarks had her advocating for the central bank to cut the size of its asset-purchase program.

The Chicago Board Options Exchange Volatility Index is up 30 percent in the past month, and 15 percent in the past week, and that’s because of the tapering concern, Raich said.

On Tuesday, equities illustrated that volatility by fluctuating on either side of unchanged before sinking in afternoon trade.

The Dow Jones industrial average lost 76.49 points to end at 15,177.54, halting a Tuesday winning streak at 20 consecutive sessions.

Home-improvement retailer Home Depot Inc. fell the most among the blue-chip index’s 30 components.

“The Fed’s bond-buying program has propped up certain areas of the economy, such as home builders, and they have really taken it on the chin in the past month on fear of the Fed taking away the punch bowl,” Raich said.

And, while home builders have been hit in recent weeks, banks continued to fare well, thanks to rising interest rates, illustrated by the yield on the 10-year Treasury note, used in determining mortgage rates and other consumer loans.

A year ago, the 10-year Treasury yield started the month of June at 1.455 percent. By late May of this year, that yield was climbing to just above 2 percent for the first time in more than a year.

“The Fed wants that yield to go up; it will help banks with their net interest margins. For the spread-base lenders, it helps their profits,” said Raich.

Year-to-date, the financial sector has been the best performer, a fact that Raich attributes to the Fed’s monetary policy. When the Fed began its monetary easing, “you had to overweight the financials and the home builders, as that is who they were targeting,” said Raich.

The S&P 500 index fell 9.04 points to 1,631.38.

Shares of Dollar General Corp. fell 9.2 percent after the retailer reduced its 2013 earnings outlook. “A lot of these retailers reporting in the last quarter have been cutting their estimates pretty hard,” said Raich.

The Nasdaq composite lost 20.11 points to 3,445.26.

On the New York Mercantile Exchange, the price of a barrel of oil reversed course multiple times before closing down 14 cents at $93.31. Gold futures lost $14.70 to close at $1,397.20 an ounce.

Speaking at a panel discussion on employment Tuesday afternoon, Sarah Bloom Raskin, a governor of the Federal Reserve’s board, said the nation’s 7.5 percent jobless rate “still remains too high” and it underestimates “the scope of the problem,” Reuters reported.

“With unemployment still high, the Fed needs that closer to 7 percent before it takes its foot off the gas,” Andrew Fitzpatrick, director of investments at Hinsdale Associates, said in emailed commentary.

“Friday’s jobs report should give us a strong indication as to the health of the economy,” added Fitzpatrick of the nonfarm-payrolls report for May.

On Wednesday, the ADP employment report for May is slated for release, followed by Thursday’s weekly jobless claims.

Ahead of the open, U.S. stock futures extended gains after the Commerce Department reported the U.S. trade deficit climbed 8.5 percent to $40.3 billion in April, less than the $41.5 billion projected by economists.

Data from CoreLogic showed home prices rose 12.1 percent in April.