MarketView for June 19

Summary 

Wall Street was hit hard on Wednesday, with the major equity indexes falling more than 1 percent after Federal Reserve Chairman Ben Bernanke said the central bank would start to reduce its stimulus measures later this year if the economy is strong enough. Equities have been closely tethered to ultra-loose monetary policy, which has been a key factor in the S&P's climb of more than 14 percent so far this year.

At the same time, the benchmark 10-year Treasury note saw its yield increase to a 15-month high on expectations the Fed will reduce its bond buying. The benchmark 10-year U.S. Treasury note fell 1 9/32, with the yield at 2.3325 percent.

Bernanke said at a news conference the Fed may reduce its bond-buying program with the goal of ending in mid-2014. While investors have expected the Fed to pull back on its stimulus, Bernanke's comments gave the most explicit timeline to markets, causing stocks to tumble on heavy volume. In the days leading up to the Fed announcement, stocks had swung between modest losses and breakeven.

Shortly before Bernanke spoke at a news conference, Fed policymakers said in a statement the Fed would keep buying $85 billion in bonds per month and gave no explicit indication that it was close to scaling back the stimulus program. The stimulus helped the stock market reach a record high on May 21, one day before Bernanke said the Fed could reduce its bond-buying in the "next few meetings" if the economy gained momentum. His comments rocked markets, boosting bond yields and halting stocks' rally.

Despite the increased volatility of the past month, the market has moved largely sideways. The S&P 500 is about 2.4 percent below its record high of 1,669.16, reached May 21.

Real estate investment trusts, whose chunky dividends attracted investors during the low interest-rate period, were among the hardest hit on Wednesday. REITs are exempt from corporate-level income tax if the companies distribute at least 90 percent of their taxable income in the form of dividends to shareholders. Since Bernanke began signaling the possible end of the policy, the index is down 12 percent.

Shares of Adobe Systems ended the day up 5.6 percent, closing at $45.78 a day after the maker of Photoshop and Acrobat software reported a higher-than-expected adjusted quarterly profit.

FedEx reported higher quarterly earnings than expected as its ground shipment business improved. Shares ended the day up 1.1 percent at $100.54.

After the market closed, Jabil Circuit fell 1.6 percent in extended trading after it reported results while Micron Technology lost 1.3 percent. Red Hat rose 2.4 percent after its results.

On the downside, Sprint Nextel was both the most heavily traded stock on the New York Stock Exchange and one of the largest decliners on the S&P 500, down 4.4 percent to $7. Japan's SoftBank cleared a major hurdle in its attempt to buy Sprint as rival bidder Dish Network declined to make a new offer after SoftBank sweetened its own bid last week.

Approximately 6.65 billion shares changed hands on the three major equity exchanges on Wednesday, above the daily average so far this year of about 6.36 billion shares.

Bernanke Speaks

The Federal Reserve will keep its version of the monetary printing press running a while longer, though Chairman Ben Bernanke provided hints Wednesday that the days of extreme easing are coming to a close. At his news conference, Bernanke said if the economy continues to improve the asset-purchasing program could start winding down towards the end of 2013 and wrap up in 2014.

Markets sold off aggressively on the news, with major averages dropping nearly 1 percent. The five-year Treasury note hit its highest yield since August 2011 while the benchmark 10-year note hit a 2011 high.

The central bank's Open Market Committee tiptoed around the vaunted "tapering" question, saying it will continue watching the economy for more gains.

The Fed itself more or less met market expectations for this week's meeting, though some traders thought it would lay out a groundwork that could lead to at least a modest tightening of its $85 billion a month bond-buying program by September.

In the news conference, Bernanke said scale-backs in the asset purchasing program will only happen if the economic data gets better. Interest rate hikes, he said, are a separate issue and "still far in the future."

While the Fed's economic forecast indicated some mild optimism for growth, Bernanke said investors shouldn't read too much into that in terms of Fed policy.

"If you draw the conclusion that I've just said that our purchases will end in the middle of next year, you've drawn the wrong conclusion, because our purchases are tied to what happens in the economy," he said.

In other matters, Bernanke refused to address questions about his future at the Fed as his second term winds to a close. President Barack Obama caused a stir this week when he said the chairman had stayed on longer than he intended.

The Fed statement changed little from the May meeting, though it did sound a modestly upbeat note on the economy.

Bernanke said discussion at the meeting did yield one other change: A desire to hold onto its mortgage-backed securities, which it is buying to spur economic growth.

"While participants continue to think that in the long run the Federal Reserve portfolio should consist predominantly of Treasury securities, a strong majority now expects that the committee will not sell agency mortgage-backed securities during the process of normalizing monetary policy," he said.

In its economic projections, the committee modestly raised its expectations for gross domestic product growth for 2014, from 2.9 to 3.4 percent to 3.0 percent to 3.5 percent. Bernanke had never presided over an economy that grew more than 3 percent on an annualized basis.

"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall," the statement said.

Markets have been intent on finding signs for when the Fed will end its  quantitative easing program, which has driven the central bank balance sheet to $3.45 trillion and sparked worries about asset bubbles in risk assets.

The Fed credits itself with funds that it uses to buy Treasury and mortgage-backed securities.

As part of a historic level of easing, the Fed also has kept its target funds rate near zero, where it will stay until unemployment falls to 6.5 percent and inflation rises to 2.5 percent. The jobless rate currently stands at 7.6 percent while inflation is tracking at 1.4 percent.