Wall Street took another major hit Wednesday as stocks reversed Tuesday’s dramatic rebound with an equally dramatic loss that more than wiped out yesterday’s gains.
The Dow Jones industrial average ended the day down 520 points, or 4.63 percent, putting the blue-chip index below the 11,000 level it had broken through yesterday and closing at its lowest level this year. The Standard & Poor’s 500, a broader market measure, ended the day down about 52 points, or 4.42 percent, while the Nasdaq, a more tech-heavy index, was down about 101 points, or 4.09 percent.All three indexes had ended Tuesday up more than 4 percent, fueling hope that the market might soon find a floor and avoid more heavy selling.
But Wednesday’s reversal signals more volatile trading is likely to come just a day after the Federal Reserve announced it would keep its ultra-low interest rate policies in place for two more years. It also puts in question the strength of Tuesday’s late-session rally, which restored early losses after the Federal Reserve announcement and put the Dow up 429 points for the day, or a gain of nearly 4 percent, the largest in two years.
In Europe, underlying fears about the global economy already caused a stock market rally to peter out Wednesday while in Asia markets mostly closed higher, with Japan’s Nikkei 225 index posting a gain of more than 1 percent after trading lower all this week.
“The market is caught at the moment between the short term-focused trading and day-to-day events like the Fed announcement yesterday and European concerns today versus longer-term money willing to make a commitment over time,” said Kevin Caron, market strategist for the private client group at Stifel Nicolaus in Florham Park, N.J.
Until the market sees credible evidence of improved economic conditions, patient, long-term investors will continue to stay on the sidelines and stocks will continue to be “subject to the vicissitudes of short-term trading gyrations,” Caron predicted.
But it might take some time for evidence of improving economic conditions to shine through. In the past few weeks, new economic indicators have shown that growth was much weaker in the first half of the year than previously thought, that job creation has been soft in the past few months, and that the manufacturing sector is slowing. The U.S. economy appears at greater risk of falling back into recession.
The Fed reflected these views in its policymaking statement Tuesday, which said that “indicators suggest a deterioration in overall labor market conditions in recent months.”
Markets initially fell when the Fed released its gloomy statement but recovered before Tuesday’s closing bell, breaking a recent string of daily losses.
Stifel Nicolaus’s Caron pinned the rally on the Fed’s move to keep interest rates low through 2013, which “is almost like squeezing a tube of toothpaste” in that it forces investors to get out of short-term government debt and into riskier assets like stocks or longer-term bonds in order to preserve any remnants of decent return.
Investors continued to buy into longer-term Treasury bonds on Wednesday, sending their yields down to 2.12 percent in mid-afternoon trading. That’s down from 2.25 percent Tuesday and more than 3.3 percent at the beginning of the year. A lower yield indicates investors are willing to accept a smaller return in exchange for the safety of holding government bonds.
Other safe bets also rallied, as investors bought up gold futures, briefly sending the metal as high as $1,793.30 per Troy ounce in mid-day trading. That’s up more than 3 percent from yesterday’s already record close of $1,740 per Troy ounce.
Oil also climbed modestly, with crude futures trading up about 80 cents to just over $80 per barrel in mid-afternoon trading.