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The Federal Reserve lived up to market expectations, delivering the economic stimulus package termed ‘Operation Twist.’ But its acknowledgement of “significant downside risks” to the economy pulled the benchmarks down to their biggest drop this month. It was during the final 45 minutes of trading that the markets plunged sharply with the Dow losing almost 200 points. Traders also attributed the final-hours fall to investors exiting bets they made last week and looking for new short positions.

 

The Dow Jones Industrial Average (DJIA) slid 283 points or 2.5% to settle at 11,124.84. The Standard & Poor 500 (S&P 500) plunged 2.9% to finish the day at 1,166.76. The Nasdaq Composite Index dropped 2% and settled at 2,538.19. It was a relatively busy day for the Street as consolidated volumes on the New York Stock Exchange, Amex and Nasdaq clocked in at 9.12 billion shares, well above the daily average of 7.91 billion. On the NYSE, decliners outnumbered advancing stocks by a ratio of 5:1.

 

As expected, the central bank announced its plan to swap the short-term debt in its portfolio with long-term Treasury bonds, mirroring similar measures in the 1960s. The move that is aimed to cut down on borrowing costs will have the central bank purchasing $400 billion of Treasury bonds that range between 6 and 30 years and selling an equal amount of short-term maturities. Additionally, in a bid to boost the housing sector, the Fed announced that it would not modify the size of its mortgage-backed securities portfolio.

 

However, investors seemed to have little faith in these plans and believe they will hardly have an effect on borrowing in a flagging economy. The economy has not yet been able to recover completely from 2008’s economic collapse and with domestic and global economies looming large; investor fears of difficult times ahead seem justified. The Federal Reserve itself acknowledged the economic weakness saying that is working in view of “significant downside risks to the economic outlook, including strains in global financial markets”.

 

Banking stocks were among the ones to feel most of the pinch and the Financial Select Sector SPDR (XLF) fund slid 5.0%. Among the bellwethers, Bank of America Corporation (NYSE:BAC), The Goldman Sachs Group, Inc. (NYSE:GS), Morgan Stanley (NYSE:MS), JPMorgan Chase & Co. (NYSE:JPM), Citigroup, Inc. (NYSE:C), Wells Fargo & Company (NYSE:WFC) and U.S. Bancorp (NYSE:USB) plunged 7.5%, 4.6%, 8.6%, 5.9%, 5.2%, 3.9% and 5.1%, respectively. Amidst these tensions, Moody's Corp. (NYSE:MCO) downgraded Bank of America, Wells Fargo and Citigroup’s debt ratings. On the European front, Italian banks also faced trouble after Standard & Poor’s downgraded seven Italian banks’ credit rating on Wednesday.

 

Insurers also received a battering yesterday, as the historically low interest rate is likely to hurt their investment portfolios. Among the decliners were Lincoln National Corp. (NYSE:LNC), National Western Life Insurance Company (NASDAQ:NWLI), StanCorp Financial Group Inc. (NYSE:SFG) and Protective Life Corp. (NYSE:PL) and they declined by 8.4%, 2.3%, 5.4% and 4.1%, respectively.

 

While all eyes remained fixed on the Federal Reserve’s announcement, data about a surge in the existing-home sales in August was hardly factored in. According to the National Association of Realtors: “Total existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 7.7 percent to a seasonally adjusted annual rate of 5.03 million in August from an upwardly revised 4.67 million in July, and are 18.6 percent higher than the 4.24 million unit level in August 2010”. “Some of the improvement in August may result from sales that were delayed in preceding months, but favorable affordability conditions and rising rents are underlying motivations,” noted Lawrence Yun, NAR chief economist.



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