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Stocks Fall on Fear That Cheap Money May End Soon

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This morning, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) moved as high as 155 points before starting its descent and ending the day down 80 points, or 0.52%. The other two major indexes also followed a similar path and both ended the day in the red. The S&P 500 lost 0.83% while the Nasdaq closed the day down 1.11%.

One catalyst for the move higher this morning was news that existing home sales in April rose higher by 0.6%, average time on market fell during the month, and prices increased. It was also reported that applications for mortgages and refinancing dropped for the second week in a row, which is clearly not a good sign.

But the real reason stocks fell today came from Ben Bernanke and the Federal Reserve. In his testimony in front of Congress this morning, he hinted that the Fed's bond-buying program may soon begin to slow. And while investors didn't like hearing that from the Fed chairman, they really didn't like reading it in the Fed's last meeting minutes, which were released this afternoon, that a number of Fed members pushed for a slowdown at the last meeting. Investors' fears that the days of cheap money and Fed-induced stock market rally may be coming to an end sent stocks falling.

A few Dow losers
Shares of Boeing (NYSE: BA  ) closed lower by 0.83% today. The company announced this morning that it would continue to reduce its research and development spending, which will allow it to give more back to shareholders. Additionally, Boeing plans to return 80% of its free cash flow to owners in the form of dividends and share buybacks. While these moves sound great on the surface, R&D spending is extremely important and is what will move the company into the future. Additionally, reinvesting in the company in other areas of the business will be difficult if management plans to give 80% of its free cash flow to investors. This may be a short term win but a long-term loss. 

Merck (NYSE: MRK  ) also announced today that it would be buying back additional shares. The company plans to spend $5 billion on almost 100 million shares that Goldman Sachs owns. While 100 million share buyback sounds great, Merck has 3.02 billion shares outstanding so, although this move will reduce float, the company could have spent the money in a wiser way. Merck has been facing a number of headwinds as major drugs fall off patent protection and with $16 billion in cash but slightly more than $20 billion in debt, shareholders would likely have been better off if the company held on to the $5 billion or paid down some of its debt.

Telecom giant Verizon (NYSE: VZ  ) saw shares decline by 1.15% today as a large amount of news surrounded the stock. Verizon announced that it would be partnering with Jennifer Lopez, who is planning on opening a number of wireless retail stores around the country in an effort to appeal to the Latino market. Another story that likely played a role in the declining share price was that while Verizon may have the largest LTE Network, rival AT&T (NYSE: T  ) was crowned with the fastest. The experts at TechHive conducted their annual survey and found that for the second year in a row AT&T had the fastest network, averaging download speeds of 13.15 mbps and 6.45 mbps for uploads.  

More Foolish insight

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  • Report this Comment On May 22, 2013, at 11:45 PM, prginww wrote:

    Cheap money is really something we should fear. It is just with the economy picking up, here and in other parts of the world, the printing press of US dollars should be stopped and its value would be restored at least in my opinion. It's just that Germany had (after WWI) printed money so fast

    that that it lost all value and help cause WWII.

    As for Boeing, I really doubt they are going to let R&D suffer just because they return some of their profits to their investors. I have already enjoyed a number of Boeing's stock splits as well as collecting dividends for a few decades.

    Honest capitalism is what pays the bills, not socialism as some of our misguided leaders and naïve teachers seem to think.

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S&P 500 2,151.13 -20.24 -0.93%
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Related Tickers

9/29/2016 4:35 PM
^DJI $18143.45 Down -195.79 -1.07%
BA $131.03 Down -1.20 -0.91%
Boeing CAPS Rating: ****
MRK $61.91 Down -1.39 -2.20%
Merck and Co. CAPS Rating: ****
T $40.73 Down -0.12 -0.29%
AT and T CAPS Rating: ****
VZ $52.12 Up +0.06 +0.12%
Verizon Communicat… CAPS Rating: ****