US investors endured another week of declines after the US Federal Reserve surprised markets by signaling that it would begin to taper its bond-buying program later this year.
The Fed’s announcement prompted dramatic declines in US markets on Wednesday and Thursday and triggered significant drops in international equity markets on Thursday. The market performed better on Friday, with two of the three major indices closing higher, but not before experiencing several big swings throughout the day as interest rates on US Treasury bonds spiked ever higher.
For the week, the Dow Jones Industrial Average finished 270.78 points (1.8 percent) lower at 14,799.40. The broad-based S&P 500 ended 34.3 (2.1 percent) lower at 1,592.43, while the NASDAQ Composite Index fell 66.31 (1.94 percent) to 3,357.25.
It was the fourth time in the past five weeks that stocks closed the week lower.
While all industrial sectors of the S&P 500 tumbled, cyclical sectors like energy, financials and industrials did comparatively well.
The biggest declines came in utilities, materials and consumer staples, so-called “defensive” stocks that pay good dividends and normally fare well in down markets.
However, the appeal of dividend stocks has waned as interest rates have risen, said Sam Stovall, chief investment strategist at Standard & Poor’s. These sectors were also vulnerable after posting outsized gains earlier in the year.
“They got hit hard because they’re expensive,” Stovall said.
In contrast to the first part of the year, which saw equity markets repeatedly reach new all-time records, the mood among investors has grown increasingly uneasy in recent weeks.
“So far this year, everything has been very calm and subdued, and now all of a sudden, we have risks reintroduced in the market, with interest rates spiking [and volatility] returning to levels we haven’t seen for a while,” Kenjol Capital Management portfolio manager David Levy said.
“We are very cautiously positioned right now,” he added.
Markets have been on edge for weeks ever since the Fed began sending signs that it could soon scale back its US$85 billion a month bond-buying plan.
Stovall believes the market is due for more volatility.
“There’s a good possibility that this decline has yet to run its course,” he said.
Last year, there were only three days in which the S&P 500 fell 2 percent or more and there had been only one day so far this year, Stovall said. That contrasts with the norm since 2000 where there has been an average of 15 days per year where the S&P declined by at least 2 percent.
Still, many market watchers had been confident heading into Wednesday that Fed Chairman Ben Bernanke would not put a timetable on tapering the program, reckoning that the economy was still too fragile.
However, Bernanke told a news conference that the Fed expects to “moderate the monthly pace of purchases later this year.”
“What surprised us is that he did not attempt to quiet the markets,” Hugh Johnson Advisors chairman and chief investor officer Hugh Johnson said.
“The days of wine and roses and artificially low longer-term interest rates will end,” he said. “That’s why the market adjusted to reality.”
The yield on long-term US Treasuries, which had already been trending higher since the middle of last month, surged higher last week. The rate on the 10-year Treasury closed the week at 2.51 percent, up 17.8 percent from a week ago.
The US economic calendar is busy next week and includes the latest S&P Case-Shiller home price index and the revision of first quarter GDP.
FTN Financial chief economist Chris Low said he would be looking especially closely at durable goods orders and personal income and spending, the latter to see if there is any significant drag from the government budget cuts known as the “sequester.”