MarketView for June 20

Summary 

The major equity indexes fell more than 2 percent on Thursday, extending the previous day's sharp decline as investors fretted over the Federal Reserve's plan to begin reducing its stimulus later this year if the economy strengthens.

The S&P 500 recorded its largest daily decline since November 11, 2011, on the year's heaviest day of trading. All 10 S&P sectors were sharply lower, with 94 percent of stocks traded on the New York Stock Exchange down for the day and more than four-fifths of Nasdaq-listed shares ending lower.

The Fed's program of bond-buying has fueled stock market gains this year, sending indexes to a series of all-time highs. A trend emerged of investors buying on market dips and limiting stocks' decline.

The S&P 500 index closed below its 50-day moving average for only its second time this year. An extended break below that level, a key technical measure of the recent trend in stocks, could add to selling pressure. It also closed under 1,600 for the first time since May 2.

Bernanke on Wednesday said the central bank's policy of buying $85 billion in bonds per month could start to wind down this year if the economy is strong enough and could finish in mid-2014.

Also adding to the market's concerns, China's interbank funding costs surged as the government ignored market pressure to inject funds into the market despite more evidence China's economy is slowing. Chinese stocks dropped 2.8 percent.

Among the U.S. sectors hit hard on Thursday were homebuilders, down 6.7 percent on concerns of higher borrowing rates. Data on Thursday showed sales of existing U.S. homes rose in May rose to a 3 1/2-year high.

Pulte fell 9.1 percent to $18.87 as the largest decliner on the S&P 500, followed by D.R. Horton, down 9 percent to $21.31.

The benchmark 10-year U.S. Treasury note fell 15/32, with the yield at 2.408 percent.

The S&P has fallen about 4 percent from its all-time closing high on May 21 of 1,669.16. Other markets around the world have also have fallen dramatically, with the MSCI's all-country world markets index dropping 3.7 percent, its largest single-day drop in 19 months.

Each of the 10 S&P industry sectors fell more than 1 percent with consumer staples leading the losses with a 3 percent drop. Kroger fell 6.1 percent to $32.98 after the company said its sales growth missed expectations in the first quarter.

Energy shares were also sharply weaker, dropping alongside a 2.9 percent slump in the price of crude oil.

Walt Disney shares fell 3.7 percent to $61.98 after Goldman Sachs removed the stock from its "conviction buy" list.

Shares of Ebix lost 44 percent to $11 a day after the insurance software provider said that it and an affiliate of Goldman Sachs would cancel their planned merger.

Oracle fell in extended trading after the company reported an increase in new software sales that was at the low end of its own forecasts.

On the upside, GameStop ended the day up 6.3 percent to close at $40.94 a day after Microsoft said users of its forthcoming Xbox One game console will be able to lend or sell used disc-based games, a plus for GameStop's used games business.

Jabil Circuit rose 1.5 percent to $20.12 a day after announcing an unspecified number of job cuts as part of a restructuring plan.

About 9.29 billion shares changed hands on the three major equity exchanges, a number that was above the daily average so far this year of about 6.36 billion shares.

Economic Data Supports Bernanke

Home re-sales hit a 3-1/2-year high in May and factory activity in the Mid-Atlantic region rebounded this month, backing the Federal Reserve Chairman, Ben Bernanke's view that risks to the economy have diminished.

While other data on Thursday showed more Americans than expected filed new claims for unemployment benefits last week, the increase was not big enough to signal a material shift from the recent pace of moderate job growth.

Higher taxes and deep government spending cuts that took effect this year had raised fears that the economy could slow abruptly, but the recovery appears to moving to firmer ground.

The data came a day after the Fed painted a fairly upbeat picture of the economy and said it expected to slow the pace of its bond-buying stimulus later this year, bringing it to a halt around the middle of 2014. The central bank is buying $85 billion in bonds per month in an effort to keep interest rates low and drive down still-high unemployment.

Existing home sales rose 4.2 percent to an annual rate of 5.18 million units, the highest level since November 2009, the National Association of Realtors said.  At the same time, the median home price surged 15.4 percent from a year ago to $208,000. It was the biggest year-over-year increase since 2005 and left prices at their highest level since July 2008.

The economy's resilience in the face of Washington's belt-tightening largely reflects the spillover effect from surging home prices, which are supporting household net worth and buoying consumer confidence.

In a separate report, the Philadelphia Federal Reserve Bank said its business activity index rebounded to 12.5 this month from minus 5.2 in May, marking the highest reading in two years. A reading above zero indicates an expansion of manufacturing in the mid-Atlantic region, which covers eastern Pennsylvania, southern New Jersey and Delaware.

The gain, which reflected a surge in new orders to a two-year high and an improvement in factory employment conditions, followed a similar bounce back in manufacturing activity in New York State.

Although a report from financial data firm Markit showed a slower pace of national factory activity in June, economists said the regional data suggested a survey from the Institute for Supply Management due early next month would likely show activity clawed back into expansion territory.

In a third report, the Labor Department said initial claims for state unemployment benefits rose 18,000 last week to a seasonally adjusted 354,000. A four-week moving average, which irons out weekly volatility, rose 2,500 to 348,250 - level economists usually associate with steady job gains.

The data added further fuel to a dollar rally touched off by the Fed on Wednesday, with the greenback reaching a two-week high against a basket of currencies.

Prices for stocks and bonds, which were hit hard on Wednesday, continued to fall. The yield on the benchmark 10-year U.S. Treasury debt note rose to a near two-year high.

Last week's jobless claims data covered the period in which the government surveyed companies for June's nonfarm payrolls count. Claims increased 10,000 between the May and June survey periods, suggesting little change in the pace of job creation.