Comments from Federal Reserve Chairman, Ben Bernanke acted as a catalyst, pushing benchmarks to their steepest fall in past three weeks on Wednesday. Existing home sales data came in marginally below the consensus estimate. Meanwhile, China’s HSBC Purchasing Managers' Index (PMI) declined to its lowest level in seven months. All the top ten S&P 500 industry groups suffered losses among which utilities stocks suffered the most.
The Dow Jones Industrial Average (DJI) lost 0.5% to close the day at 15,307.17. The S&P 500 decreased 0.8% to finish yesterday’s trading session at 1,655.35. The tech-laden Nasdaq Composite Index slipped 1.1% to end at 3,463.30. The fear-gauge CBOE Volatility Index (VIX) gained 3.4% to settle at 13.82. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and Nasdaq were roughly 8.34 billion shares, well above 2013’s average of 6.36 billion shares. Declining stocks outnumbered the advancers. For the 22% that advanced, 75% declined.
The much awaited testimony from Ben Bernanke dampened investor sentiment on Wednesday. Trading started on a positive note when major indices had gained almost 1%. However, post afternoon, benchmarks slipped into red following comments from the Fed chairman. Bernanke agreed that monetary stimulus has helped the economy get back onto its feet, but it is essential for the Central Bank to know if this trend will continue. He added that the Fed might roll back the purchase of $85 billion bonds if economic growth continues in future. This might be done over the “next few meetings.”
The main objective of the monetary stimulus program was to bring inflation rate to 2% and unemployment level to 6.5%. As of now, neither of the targets has been met. At 1%, inflation has reached just half way and unemployment at only 7.5%. However, unemployment level has dropped significantly, from 10% during 2010 to current 7.5%. The first quarter witnessed a string of encouraging economic reports. But the second quarter’s data has been far from encouraging. Employment numbers, housing market and retail sales data have improved but factory and manufacturing numbers have fallen back.
Commenting on the possibility of increasing or decreasing bond purchases, Bernanke said, "If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings ... take a step down in our pace of purchases."
Minutes of the Fed's April 30-May 1 meeting released Wednesday show "a number" of members expressed a willingness to scale back the $85 billion a month in Treasury and mortgage bonds the Fed has been purchasing, perhaps as soon as June, if the economy accelerates.
On the domestic front, according to the National Association of Realtors, total existing home sales inched up 0.6% from March’s figure of 4.94 million to 4.97 million. However, this figure is below the consensus estimate of 4.99 million. The figure fell short of the consensus owing to tight credit and limited inventory. On a year over year basis, resale activity increased 9.7%, above April 2012’s figure of 4.53 million.
Meanwhile, China’s flash HSBC Purchasing Managers’ Index for May came is below 50.0 for the first time in seven months. The index came in at 49.6, below previous month’s level of 50.4.The decrease in the PMI index is attributable to low new order numbers. The new order index for the month also fell below the 50.0 level to 49.5. The second quarter has witnessed a string of weak economic numbers from China, igniting fears about growth in the world’s second largest economy. Besides a couple of reports, all major economic numbers have fallen.
Among the top ten S&P 500 industry groups, utilities stocks have suffered the most. The Utilities SPDR (XLU) slipped 1.7%. Stocks such as Duke Energy Corp. (NYSE:DUK), the Southern Company (NYSE:SO), Dominion Resources, Inc. (NYSE:D), NextEra Energy, Inc. (NYSE:NEE) and Exelon Corporation (NYSE:EXC) lost 1.7%, 1.5%, 2.4%, 1.7% and 1.2%, respectively.