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Stocks Swatted, Bonds Blistered After Bernanke Spooks Market

This article is more than 7 years old.
(AP Photo/Richard Drew)

Wall Street was a sea of red Thursday, on the heels of Federal Reserve Chairman Ben Bernanke’s Wednesday signal that the central bank could start slowing its asset purchases later this year.

Bernanke was sure to qualify his remarks at Wednesday’s press conference, comparing a tapering of asset purchases to taking his foot off the accelerator, but the initial market reaction indicates traders view the Fed chief’s remarks as a warning that the brakes are coming.

The selloff, which began in the U.S. Wednesday afternoon before racing around the world, produced heavy losses in every asset class. Equities took a beating .Japan’s Nikkei dropped nearly 2% and the major European indexes fell even further.

In the U.S., early losses grew into the market's worst single-day drop since November 2011. The S&P 500 dove 41 points, 2.5%, to 1,588. Volatility surged, with the VIX up almost 30% to 21.2 The Dow Jones industrial average plunged 354 points, 2.3%, at 14,758 and the Nasdaq 79 points, 2.3% at 3,365.

Bonds slumped with the 10-year Treasury yield jumping to 2.42%, its highest level in more than a year.

Commodities took a beating, as crude oil dropped more than 3.5% to below $95 a barrel and gold prices plunged almost 7% to $1,278 an ounce. The dollar was one of the few assets in positive territory, rising against the euro and versus the Japanese yen.

While Thursday’s slide was steep, some context is worth remembering. The S&P 500 Is still hanging onto a 12% gain for the year and the crux of Bernanke’s policy argument is that the Fed will only taper or remove accommodations like quantitative easing as warranted by economic data.

The FOMC next meets in July, but it won’t be until September that the chairman hosts his next press conference. It is widely believed that any major policy actions would only be taken when Bernanke has an opportunity to explain the rationale for them, so the September meeting would seem to be the earliest any taper could begin. And by then the market will have several more months of economic readings to digest, including June, July and August employment figures.

Thursday’s selloff was indiscriminate, but there are sectors better positioned to absorb rising rates than others. Financials, for one, will make more on the money they put to work if rates are higher – JPMorgan Chase Chief Executive Jamie Dimon recently said his bank could make billions if the 10-year Treasury rate were to move by a few hundred basis points.

The biggest losers were the home builders, likely on the assumption that rising Treasury rates will translate into higher mortgage rates and crimp the rebound in home buying. PulteGroup and DR Horton closed with 9% losses while Lennar fell almost 8%. Toll Brothers , a high-end builder believed to be somewhat more insulated from the impact of higher mortgage rates due to greater financial resources of its customers, cut its losses to below 5% by the bell.

The S&P 500 was not completely devoid of winners bucking the trend though. GameStop managed a 6% advance, while insurers including Unum Group and a number of regional banks like Zions Bancorporation and M&T Bank also closed higher.

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