Markets eroded initial gains on Tuesday after it emerged that the Federal Reserve had no new gifts to offer to the economy. The central bank also cautioned that the global financial scenario poses a serious threat for the domestic economy. Additionally, with the pre-holiday rush supposedly setting in, a less than expected increase in retail sales acted as a deterrent to optimism among investors.
The Dow Jones Industrial Average (DJIA) declined 0.6% to finish the day at 11,954.94. The Standard & Poor 500 (S&P 500) was down 0.9% and closed the day at 1,225.73. The tech-laden Nasdaq Composite Index settled at 2,579.27, sliding 1.3% lower. The fear-gauge CBOE Volatility Index (VIX) inched down a percentage to settle at 25.41, and reflected a lower level of concern for the second consecutive day. With Christmas around the corner, investors have kept their hopes alive of rally during that period. Total volumes on the New York Stock Exchange (NYSE) was 4.13 billion shares and for 70% of the decliners, around 28% closed higher. The remaining stocks remained unchanged.
The Dow had gained 126 points during the session, before a host of concerns dragged the blue-chip index down by over 70 points in the final hour. While Boeing Co. (NYSE:BA) and Merck & Co. Inc. (NYSE:MRK) managed to remain flat, only seven of the remaining Dow components could finish the day in green. Among the 21 components that declined, Alcoa, Inc. (NYSE:AA), Bank of America Corporation (NYSE:BAC), Caterpillar Inc. (NYSE:CAT) and JPMorgan Chase & Co. (NYSE:JPM) slumped 3.3%, 2.4%, 2.4% and 2.3%, respectively, and were the leading decliners.
Markets had been in an upbeat mood in the morning session and the euro-zone’s first sale of short-dated debt helped contributed significantly to initial gains. In its first sale of the short-term bills, The European Financial Stability Fund logged encouraging figures, raising $2.6 billion from investors at a rate of 0.2%. Additionally, short-term borrowing costs of Spain and Belgium also dropped significantly.
However, with the Federal Reserve making it prominent that its kitty had no Christmas gifts for the economy, the benchmarks had to vacate the green zone. The Federal Reserve’s final meeting of the year announced no new quantitative easing or monetary policies. Not only did the central bank disappoint the investors with no signs of a third monetary stimulus plan, but it also note of caution that the global financial situation could possibly dent US financial markets. Cross-Atlantic concerns have affected the domestic markets throughout this year, and the central bank was forthright in acknowledging that such fears would continue to harm the otherwise ‘healthier’ US economy. The Fed stated: “Strains in global financial markets continue to pose significant downside risks to the economic outlook".
To add to these woes, retail sales data from the Commerce Department came in well below expectations. With the holiday season ahead and the pre-holiday rush settling in, retail sales numbers should have come in above the expectations and not otherwise. According to the U.S. Census Bureau: “Advance estimates of U.S. retail and food services sales for November, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $399.3 billion, an increase of 0.2 percent (±0.5%)* from the previous month and 6.7 percent (±0.7%) above November 2010”.
Consequently, the retail sector was in for bad times yesterday and the SPDR S&P Retail (XRT) was down 3.0%. Stocks like Macy's, Inc. (NYSE:M), J. C. Penney Company, Inc. (NYSE:JCP), Sears Holdings Corporation (NASDAQ:SHLD), Bon-Ton Stores Inc. (NASDAQ:BONT) and Saks Incorporated (NYSE:SKS) plunged 5.0%, 3.9%, 5.1%, 6.6% and 4.4%, respectively.