MarketView for January 29

Summary

The major equity indexes were down more than 1 percent on Wednesday, hitting session lows after the Federal Reserve did not change its plan to scale back stimulus even in the midst of emerging market turmoil. With Wednesday's decline, the S&P 500 index is now down 4 percent for the month - its worst monthly loss since May 2012.

Meanwhile, trading was volatile after the Fed's move, which further reduces its monthly bond purchases by $10 billion a month. Declines were fairly broad-based, with nine of the 10 S&P 500 sector indexes ending the day lower. Shares of Boeing ranked among the largest losers on both the Dow Jones Industrial Average and the S&P 500 indexes.

Boeing's shares ended the day down 5.3 percent to close at $129.78, after the aerospace and defense company issued conservative forecasts for profit and cash flow, with the result that the Street focused its attention on those projections, despite the company’ sharp rise in quarterly earnings.

Overall economic improvement has suggested that the Fed would continue to cut the purchases. Nonetheless, there was always the hope or speculation by some that the Fed might rethink its plan because of the emerging market problems.

In its announcement, the Fed said it would buy $65 billion in bonds per month starting in February, down from $75 billion now. In what was Fed Chairman Ben Bernanke's last policy-setting meeting, the central bank also maintained its longer-term plan to keep U.S. interest rates low for some time to come.

The benchmark S&P 500 has lost ground in four of the past five sessions as fears over slowing growth in China and large capital outflows from developing markets prompted investors to seek safe-haven assets.

The CBOE Volatility Index, Wall Street's barometer of fear, was up 9.81 percent to end the day at 17.35.

The Fed's quantitative easing program has supported not just the economy but overseas economies as well by increasing liquidity, so reducing the stimulus has been a big factor in the emerging markets' selloff. Moreover, stocks were lower early in the session even after bold efforts by Turkey and South Africa to stabilize their currencies.

South Africa's central bank raised interest rates for the first time in six years. Its move followed a dramatic rate hike by Turkey's central bank late Tuesday, designed to defend its crumbling currency.

Yahoo fell 8.7 percent to end the day at $34.89, a day after the company reported a decline in online ad prices that hurt its revenue for a fourth consecutive quarter.

Among other earnings reports, Dow Chemical posted a quarterly earnings number that was well ahead of expectations. It also raised its dividend 15 percent and expanded its stock-buyback program. Dow ended the day up 3.9 percent to close at $44.73.

After the bell, shares of Facebook were up 9.2 percent to $58.45 after the company reported that its quarterly revenue increased 63 percent.

Quarterly earnings expectations for the S&P 500 have improved as more companies have reported results. Growth is now estimated at 9 percent, compared with 7.6 percent at the start of the month, Thomson Reuters data showed. As the stock market rallied last year, valuations rose for S&P 500 companies. The forward price-to-earnings ratio is at 14.9, compared with 13.1 at the start of 2013.

Volume was higher than average for the month with about 7.5 billion shares changing hands on the major equity exchanges, compared with the average of 6.8 billion so far this month, according to data from BATS Global Markets.

Bernanke’s Closing Act

The Federal Reserve on Wednesday decided to trim its bond purchases by another $10 billion as it stuck to a plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets. The action was widely expected, although some apparently had the dying hope that the Fed might put its plans on hold as a result of the concerns over emerging markets.

Fed Chairman Ben Bernanke, who hands the Fed's reins to Vice Chair Janet Yellen on Friday, managed to adjourn his last policy-setting meeting without any dissents from his colleagues. It was the first meeting without a dissent since June 2011 - a sign of how tumultuous Bernanke's tenure has been. In addition to proceeding with plans to scale back its bond buying, the Fed made no changes to its other main policy plank: its pledge to keep interest rates low for some time to come.

The decision to continue tapering suggests that it would take a serious threat to the economy before the Fed backs down from a resolve to shelve the asset-purchase program later this year. Indeed, it offered a somewhat rosier assessment of the economy's prospects than it did last month, stating that, "economic activity picked up in recent quarters." It also largely shook off surprisingly soft jobs growth in December. According to the Fed, "labor market indicators were mixed but on balance showed further improvement."

Moreover, the Fed held to its promise to keep rates near zero until well after the unemployment rate, now at 6.7 percent, falls below 6.5 percent, especially if inflation remains below a 2 percent target. In fact, the central bank's statement largely mirrored the one it issued after its December 17-18 meeting, when it announced an initial $10 billion cut to its monthly bond purchases.

At the time, Bernanke told reporters the Fed would likely continue to taper the purchases in "measured" steps through the year until it was fully wound down, as long as the economy continued to heal. He did not speak to the media on Wednesday.

In its statement on Wednesday, the Fed said it would buy $65 billion in bonds per month starting in February, down from $75 billion now. It shaved its purchases of U.S. Treasuries and mortgage bonds equally. In announcing its decision, the Fed made no reference to the sell-off in emerging markets that has depressed share prices on Wall Street in recent days.

Markets in countries with large current account deficits, such as Turkey and Argentina, have suffered steep losses in part because of the prospect of less U.S. monetary stimulus. Those currencies and share prices fell again after the Fed's announcement, offsetting aggressive interest rate hikes by Turkey and South Africa.

Meanwhile, such diverse data as domestic consumer spending to industrial production and trade - have suggested the U.S. recovery closed out last year on solid ground, reinforcing expectations the Fed would continue tapering program. The weak December jobs report has been viewed as an outlier.

The central bank launched its current round of bond purchases in September 2012, its third such effort since the darkest days of the financial crisis in late 2008.

The effort to bring the purchases to a halt will now fall to Yellen, who has strongly backed the unprecedented actions the Fed has taken to boost growth and get more Americans back to work. She will chair her first policy meeting on March 18-19.

Bernanke, a professor and leading scholar of the Great Depression before joining the Fed, took the central bank far into uncharted territory during his eight years on the job, building a $4 trillion balance sheet and keeping interest rates near zero for more than five years to pull the economy from its worst downturn in decades.