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Stocks drop amid Fed prediction

TradingPub Admin | January 3, 2013

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U.S. stocks declined on January 3, following sharp gains made on the previous day, as Federal Reserve officials provoked risk aversion by announcing that their existing bond-buying program will likely end in 2013.

Falling stocks 
The blue-chip S&P 500 dropped 0.2 percent to close at 1,459.24 at 4 p.m. in New York. On the day before, the group of stocks surged 2.5 percent as Washington lawmakers approved legislation preventing the nation from going over the fiscal cliff - which would involve the country adopting more than $600 billion in higher taxes and cuts to federal spending programs.

Many market participants predicted that the consequences of this event would be significant and negative, and the Congressional Budget Office released a report earlier in the year projecting that going over the fiscal cliff would push the U.S. economy into recession.

Federal announcement 
Late in 2012, Federal Reserve Chairman Ben Bernanke announced that that U.S. central bank had plans to expand its existing efforts to stimulate the economy by using monetary policy.

He stated at the time that the Fed would begin purchasing $40 billion in mortgage-based debt every month and also hold interest rates close to zero for as long as required to improve the job market significantly. These policy moves were to be added to the $45 billion in long-term bonds being bought every month by the central bank.

According to the minutes of the most recent meeting of the Federal Open Market Committee, Federal Reserve officials are likely to end the $85 billion in bond purchases per month in 2013, according to Bloomberg.

However, the minutes from the FOMC meeting reveal that these officials disagree on when these bond purchases should end, with those predicting the stimulus measures to end in mid-2013 having a similar number to the people projecting that the transactions would extend to beyond that time.

Ongoing budget disputes 
The equity markets have been roiled in recent months as U.S. lawmakers disputed their budget differences in an effort to stave off the fiscal cliff. When they came to an agreement on New Year's day, the benchmark S&P 500 surged 2.5 percent.

Now that these Washington officials have resolved this disagreement, they have started focusing their attention on different fiscal concerns, the media outlet reports. The existing limit on the national debt is fast approaching, and lawmakers may need to reduce entitlement spending in order to increase this cap on the debt.

Strong jobs data 
Another factor that contributed to rising stocks was the jobs report released by human resources firm ADP, according to the news source. The data provided by this firm predicted that U.S. employers added 215,000 to payrolls in the month of December.

This figure far exceeded the prediction of 140,000 new jobs provided by economists taking part in a survey conducted by the media outlet. On January 4, the Labor Department will release its December jobs figure.

"This is a funny day because it's in between the payroll number tomorrow and yesterday’s announcement on the fiscal cliff," Christopher Orndorff, who contributes to the management of $450 billion as senior portfolio manager at Western Asset Management Co. in Pasadena, California, told the news source by phone.

He added that "people are still trying to digest the news from yesterday and the implications of what may come with the debt limit negotiations that are going to be ongoing for the next two months, and looking forward to tomorrow’s employment report which is going to be meaningful in giving us a stronger sense of the economy."

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