MarketView for June 22

Summary  

The major equity indexes gave up considerable ground on Wednesday after the Federal Reserve confirmed what everyone already knew and that was that economic growth has slowed and that the reduced economic growth could easily continue into next year. The Fed also said it currently has no further plans to stimulate the economy with monetary policy.

The bottom line is that anyone hoping for positive comments from the Fed Chairman was sorely disappointed, and therefore had a reason to sell after a four-day rally that had lifted stocks from three-month lows. Some on Wall Street are now saying that we can look forward to some range-bound trading ahead, with 1,295 seen among the S&P 500's first targets of resistance.

In its statement, the Fed, as widely expected, said it will maintain interest rates at exceptionally low levels for an extended period. It also reiterated it was ending its $600 billion bond-buying program at the end of the month.

The central bank's policy-makers, at the end of a two-day meeting, lowered the Fed's gross domestic product forecast for 2011 to a growth rate of just 2.7 percent to 2.9 percent -- down from an April projection of 3.1 percent to 3.3 percent.

The Fed also reduced its 2012 GDP growth forecast to a range of 3.3 percent to 3.7 percent, below its previous projection.

Expectations about a second round of Fed stimulus last fall helped ignite an extended rally in stocks. There is some hope the Fed will conduct another round of asset buying, but truthfully it is extremely unlikely at this time.

After the closing bell, Bed Bath & Beyond saw its share price increase by 3.3 percent to close at $55.84 after the retailer posted a quarterly profit that exceeded Street expectations and raised its full-year earnings forecast.

Weighing on tech during the regular session, Adobe Systems fell 6.3 percent to $30.01, a day after the company reported a 54 percent jump in quarterly earnings, but warned of weakness in Europe.

Among the day's gainers, FedEx rose 2.6 percent to $91.44 after the shipping group reported strong fourth-quarter profit and forecast robust 2012 earnings.

A spate of weaker-than-expected economic data has underscored fears that the recovery is faltering, and raised worries about how the economy will fare without more support from the government. Another indicator of pessimism was that the net short positions by hedge funds on the S&P 500 have risen recently, according to Societe Generale cross-asset research.

Volume once again was lighter than normal, with just 6.2 billion shares changing hands on the major equity exchanges, as compared to a daily average of 7.58 billion shares.

Fed Reduces Forecast

The Federal Reserve on Wednesday cut its economic growth forecast, and offered no hint of further monetary support, stating that the recovery should gradually pick up heading into 2012. According to Fed Chairman Ben Bernanke, factors weighing on the economy, such as high commodity prices, should be fleeting but warned some of the weakness could linger.

"Part of the slowdown is temporary and part of it may be longer lasting," Bernanke told a news conference after a two-day Fed policy meeting.

The U.S. central bank kept official interest rates at a historic low near zero and Bernanke signaled they will stay there through the end of the year or longer. The Fed estimated the economy should grow 2.7 percent to 2.9 percent this year, down from a forecast range of 3.1 to 3.3 percent made in April. It also said it sees 2012 growth in a range of 3.3 percent to 3.7 percent, lower than its previous forecast.

In a statement, the central bank said a jump in commodity prices and supply-chain disruptions from Japan's devastating earthquake had weighed on growth and pushed up prices, but that those factors should dissipate over time.

The Fed confirmed it was ending its $600 billion bond-buying program at the end of June and reiterated it will continue to reinvest principal payments from its holdings. By the time its latest "quantitative easing" program wraps up next week, the Fed will have pumped some $2.3 trillion into the economy.

Bernanke, in a wide-ranging question-and-answer session with reporters which touched on issues as diverse as Greece's economic woes and the size of reserves that big banks should hold, conceded that our economic hopes are partly hostage to events in Europe.

"If there were a failure to resolve that (Greek debt) situation, it would pose threats to the European financial system, the global financial system, and to European political unity," he said. "So yes, we did discuss it and it is one of several potential financial risks that we are facing now."

Two years after the end of the U.S. recession, the recovery looks disappointingly weak. Employers have been reluctant to hire and the jobless rate rose to 9.1 percent in May. The Fed on Wednesday downgraded its view of the labor market and pushed its forecast for unemployment a bit higher.

It said the jobless rate would likely average 8.6 percent to 8.9 percent in the fourth quarter of 2011. In April, it had forecast a range of 8.4 to 8.7 percent. By 2013, the Fed said joblessness would still be significantly above what it considers to be consistent with full employment.

The Fed's inflation forecast was little changed at 2.3 percent to 2.5 percent for this year, but its projection of core prices, which strips out food and energy costs, moved up to a 1.5-to-1.8-percent range from 1.3 to 1.6 percent. Policymakers at the Fed strive to keep inflation in a 1.7-to-2-percent range and the acceleration in core prices could complicate any desire to further support the economy.

In its statement, the Fed dropped any reference to core inflation, which it characterized in April as being "somewhat low."

With the jobs outlook uncertain and home values falling, consumer spending -- which makes up around 70 percent of U.S. GDP -- has lagged. Factory activity has been sluggish as well.

The economy grew at just a 1.8 percent annualized rate in the first three months of the year. Analysts expect growth of around 2 percent in the second quarter, still not sufficient to generate a big uptick in hiring. The economy's weakness has led to some speculation the Fed could take fresh steps to bolster the recovery.

While Bernanke did not rule anything out, he made clear the Fed does not feel the economy is in as dire a condition as it was last fall when it launched its latest bond-buying plan. If it were pressed into action, the Fed chief said the central bank could buy more securities, lower the interest rate it pays to banks on reserves held at the Fed or even pledge to keep its balance sheet at a high level for an extended period.

Bernanke said the vow to keep interest rates exceptionally low is intended to suggest the Fed is at least two or three meetings away from a move, but that the time period could be "significantly longer" depending on the economy.