U.S. stocks decline amid speculation surrounding Fed stimulus

TradingPub Admin | May 20, 2013

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Want some stock trading education on how the equity markets can be impacted by speculation surrounding economic policy?

A perfect example of this relationship between key news and the prices of these assets is the impact that the speculation surrounding the stimulus plans of the Federal Reserve had on equity markets on May 20.

The S&P 500, a benchmark index, didn't have the greatest day, finishing down 0.1 percent at 1,666.26 at 4 p.m. in New York, according to Bloomberg. The group of stocks increased as much as 0.3 percent early in trading. The Dow Jones Industrial Average also ended the day more than 0.1 percent lower at 15,335.30.

Strong M&A activity
One factor that helped push these stocks higher earlier in the day was a group of announcements that companies made regarding their plans to make acquisitions, the media outlet reports. According to data provided by the news source, the total takeover deals announced by firms during the day surpassed $10 billion.

One major acquisition that managed to draw significant visibility was the purchase of blogging service Tumblr by social media giant Yahoo Inc, according to Reuters. Yahoo announced that it will pay $1.1 billion for the blogging service, and emphasized its commitment to making the deal work.

In an interview with Reuters, chief executive officer Marissa Mayer stated that together, the two companies will have more than 1 billion online users, which could be helpful in keeping visitors to either site involved for greater periods of time and also attracting more people to harness what these websites have to offer.

Federal Reserve speculation
After stocks rose in value, Charles Evans, president of the Federal Reserve Bank of Chicago, caused these equities to retreat by stating that the U.S. economy has improved substantially, according to Bloomberg.

Evans, who is a voting member of the Federal Open Market Committee, said that the key concern now is "how much confidence we have that the improvements that have been made will continue and be sustained," the media outlet reports.

The balance sheet of the U.S. central bank has surpassed $3 trillion, as the financial institution has engaged in economic stimulus that some have declared to be draconian due to its scope. At present, the Federal Reserve is purchasing $85 billion in debt-based assets every month in an effort to bolster the existing money supply and support existing economic growth.

Fiscal tightening and asset markets
Any tightening of this policy could potentially negatively impact the sentiment of investors and as a result, cause equities to decline.

"This big question is precisely when we'll see the market react to the imminent tighter monetary conditions," Fawad Razaqzada, market strategist at GFT Markets, wrote in emailed comments, according to MarketWatch. "The longer the rally continues arguably, the bigger the reversion we face, but if the economic backdrop is robust enough, then perhaps the resulting pain will be short-lived."

This comes after the S&P 500 has enjoyed a period lasting 127 days where the group of stocks dropped no more than 5 percent, according to data compiled by Bloomberg. The rally in the key group of stocks has been not only long-winded, but also robust. The S&P has surged 146 percent since its recent low in 2009.

"This move in the market has defied all the skeptics," E. William Stone, chief investment strategist for PNC Wealth Management, told the media outlet during a phone interview. "While all of us know where there will be some pullback at some point, it's hard to be the person to bet that tomorrow will be the case."

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