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U.S. Stocks Decline as Bernanke Spurs Concern Economy Is Slowing

Wednesday, 20 June 2012 03:23 PM EDT

U.S. stocks fell after the Federal Reserve cut estimates for economic growth as Chairman Ben S. Bernanke said progress in the job market has slowed and access to credit remains a major issue.

The Standard & Poor’s 500 Index swung between gains and losses earlier as investors weighed European discussions to fight the debt crisis and the Fed’s plans to extend its program known as Operation Twist. Adobe Systems Inc., the largest maker of graphic-design software, slid 3.3 percent after forecasting sales and profit that trailed some estimates. Procter & Gamble Co. fell 3.5 percent after cutting its earnings projections.

The S&P 500 fell 0.6 percent to 1,350.01 at 2:50 p.m. New York time. The Dow Jones Industrial Average lost 57.37 points, or 0.5 percent, to 12,779.96 today. Trading in S&P 500 companies was in line with the 30-day average at this time of day.

“It’s not all bad news, but caution is warranted,” said Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4.5 billion in Raleigh, North Carolina. “If the Fed saw significant deterioration, the policy response would have been on a larger scale. Yet there’s increased risk to the economic outlook.”

Fed officials cut their estimates for 2012 growth after last month’s slowdown in hiring and see little progress on unemployment during the rest of the year. Bernanke said the central bank is prepared to take further action to protect the economic recovery and would consider further asset purchases.

Operation Twist

The central bank will expand its program to replace short- term bonds with longer-term debt by $267 billion through the end of 2012 in a bid to reduce unemployment and protect the expansion. The continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today.

“The market was way too optimistic about getting QE3,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, referring to a third round of asset purchases. His firm oversees $160 billion. “People were throwing around numbers that were larger than what they announced for the extension of Operation Twist. It made no sense. It does seem like the Fed wants to keep some powder dry. They are doing the right thing.”

Expectations for further policy action gave stocks their first back-to-back weekly gain since April on June 15. The S&P 500 earlier this month was on the brink of a so-called correction, or a 10 percent drop from a recent peak, on concern about a global slowdown and a worsening of Europe’s crisis.

Bond Purchases

Stocks briefly recovered after German Chancellor Angela Merkel said bond purchases by the European bailout fund are a possibility. While Merkel said there was no concrete planning, she added that “there is the possibility of purchasing sovereign bonds on the secondary market.” Merkel said, “This is a purely theoretical statement about the legal situation.”

“There’s a glimmer of hope that Germany might be loosening up a little bit,” Michael Mullaney, who helps manage $9.5 billion as chief investment officer at Fiduciary Trust in Boston, said in a phone interview. “Just the possibility of bond purchasing by the bailout fund is huge. The reason is that earlier Merkel was saying she was not going along with this whatsoever.”

Stocks also rebounded as two officials said European Union President Herman Van Rompuy’s blueprint for the euro was said to discuss jointly issued short-term bills, a debt-redemption fund and common banking supervision. Earlier losses were driven by disappointment about the Fed not announcing other steps to stimulate growth.


© Copyright 2024 Bloomberg News. All rights reserved.

Wednesday, 20 June 2012 03:23 PM
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