MarketView for March 15

Summary 

Stocks fell more than one percent but ended far from session lows on Tuesday on the Federal Reserve's more upbeat economic view and growing sentiment that Japan's nuclear crisis would only temporarily depress shares. In a second straight day of losses tied to Japan, the S&P 500 fell to within four points of support at 1,257, its 2010 close. The benchmark index fell more than 2 percent in early trading and the Nasdaq briefly turned negative for the year.

Equities nearly halved their losses after the Fed stuck with its ultra-loose monetary policy and said the economy was gaining traction. Volume was high, with about 10.05 billion shares traded on major exchanges, above last year's daily average of 8.47 billion.

Options activity on the iShares MSCI Japan Index fund suggests that the earthquake based selloff was overdone. This was evidenced by the fact that investors closed out recent long put positions or opened bullish bets. The index fund, which has a market cap of about $5.58 billion, ended 0.2 percent lower on record high volume and was the most actively traded ETF.

A Japanese nuclear power plant caused low levels of radiation to drift into Tokyo, prompting people to flee the capital. Officials and markets were still trying to assess the full extent of destruction from Japan's earthquake and tsunami, with more than 10,000 people feared dead.

The Global X Uranium exchange traded fund fell 7.8 percent to $14.50. Shaw Group, an engineering and construction company that is part of a consortium that builds reactors, closed down 2.1 percent at $34.14 on more than five times its 10-day average trading volume.

Shares of GE, which has combined nuclear ventures with Japan's Hitachi, ended the day down 1.6 percent at $19.61 on more than twice its 50-day average volume.

At its session low, the S&P 500 had given back more than half the gains of the latest leg of the stock market rally, from December 1 to the year's high on February 18. The S&P 500 is still up 21 percent since September.

The CBOE VIX volatility index rose 15 percent to 24.32. Dollar-denominated Nikkei futures fell 4.9 percent and are down more than 10 percent for the year. Among U.S. stocks affected by Japan, insurer American International Group fell 1.9 percent to $36.78, while Alcoa lost 0.5 percent to close at $16.04.

Fed Maintains an Even Keel

The Federal Reserve said on Tuesday the economic recovery is gaining traction and inflation pressure from soaring energy costs should be short-lived, allowing it to maintain its heavy support for the economy. Therefore, the Fed decided unanimously to forge ahead with its $600 billion bond-buying plan despite a considerably more upbeat assessment of the economy and the job market

It made no mention of Japan, which is grappling with the aftermath of the country's worst earthquake on record -- and struggling desperately to avert a nuclear disaster.

"The economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually," the Fed said in a post-meeting statement. It was a much rosier outlook than the Fed had offered after its last meeting in January, when it characterized the recovery as still too weak to significantly bring down unemployment.

The statement also dropped a reference to economic progress being "disappointingly slow" and a list of roadblocks to consumer spending. In addition, it removed a passage stating that employers remained reluctant to hire.

However, meeting as global stock markets plunged in the aftermath of the Japanese earthquake; policymakers noted unemployment remains high, underlying inflation low and the housing sector depressed.

The Fed reiterated a pledge to keep interest rates, currently near zero, at very low levels for an extended period. That puts it at odds with other prominent monetary authorities like the European Central Bank, which has signaled a rate hike could come next month.

The Fed dedicated an unusually large portion of its statement to inflation concerns surrounding a recent spike in energy and food prices. It said it would monitor inflation and expectations for future prices closely, but added that the situation appears to be under control.

"Long-term inflation expectations have remained stable, and measures of underlying inflation have been subdued," it said.

Since the Fed's January meeting, the economy has continued to show signs of promise, with the unemployment falling to 8.9 percent in February from 9.8 percent in November. Still, the pace of hiring suggests further progress will be painfully slow for the 8-million-plus Americans who lost their jobs during the economic slump of 2007-2009.

At the same time, higher gasoline costs have created fresh concerns for consumers, with a big hit to confidence this month raising concerns whether a recent spurt in consumer spending can be sustained.

The economy expanded at an annual rate of 2.8 percent in the fourth quarter, a respectable performance but a faster pace will likely be needed to make a further appreciable dent in unemployment.

After chopping overnight interest rates to near zero in December 2008, the Fed turned to buying mortgage and Treasury debt to keep long-term borrowing costs low and support the economy. In all, it has pledged to buy $2.3 trillion in debt.

The purchases have proven controversial, with domestic critics arguing the Fed is courting inflation while officials in emerging markets have accused the central bank of trying to boost U.S. exports by devaluing the dollar.