Dow and S&P 500 Plunge on Strong GDP Growth

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) and the S&P 500 (SNPINDEX: ^GSPC  ) steadily fell today to both finish down roughly 1%. The drop came after GDP grew faster than economists had predicted, raising investors' fear that the Federal Reserve would taper sooner than previously expected. The Dow closed down 153 points, to 15,594. The S&P 500 (SNPINDEX: ^GSPC  ) finished down 23, points to 1,747.

The Dow's 0.97% loss means today was the 11th worst day this year for Dow stocks on the basis of one-day performance. "Plunge" is a bit of a strong word, but it makes sense given that today steep drop. It  also goes to show how few large down days there have been this year. Year to date, the Dow is up 19%, and the S&P 500 is up 22.5%.

^DJI Chart

^DJI data by YCharts

Today, 28 of 30 Dow stocks were in the red, while the S&P 500 was led down by the services and basic materials sectors, both of which fell 1.8%.

Losses were across the board as investors sold off stocks following the better-than-expected Gross Domestic Product report. The Bureau of Economic Analysis reported today its advance estimate of third-quarter GDP for the U.S. The U.S. economy grew at an estimated 2.8% annualized rate, better than the second quarter's 2.5% growth, and better than analyst expectations of a drop to 2.3% growth.

Better-than-expected economic growth is a downer for the markets, as it means that the Federal Reserve is more likely to end its asset purchases sooner. One of the main drivers of the market this year has been the Federal Reserve's long term asset purchase program, through which the Fed buys $85 billion worth of long-term assets each month.

The goal of the program is to boost asset prices, and create a wealth effect that will spur on the economy and create a self-reinforcing growth cycle. The Federal Reserve only has so many tools at its fingertips to spur on the economy, and asset purchases seem to be helping Wall Street a lot more than it's helping main street. A real stimulus to boost the economy would get cash into consumers' pockets, but it would take action from Congress to make that a reality.

The Fed's program has not really been effective, as growth hasn't been self-sustaining. Mortgage rates spiked at the first hint of the Fed slowing its purchases in June. After the June meeting, Bernanke said the Fed could begin tapering its asset purchases at the end of the year, as it saw the economy strengthening. While many thought those plans were put on hold by the government shutdown, the far-better-than-expected growth means tapering could, in fact, happen soon. While the Federal Reserve must still contend with low inflation, stronger growth makes the Fed all the more likely to begin tapering its purchases.

The sector that was the least changed today was the health-care sector. The sector generally moves independently of the market and, especially with the start of Obamacare, is far more dependent on government regulation than anything else.

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Comments from our Foolish Readers

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  • Report this Comment On November 07, 2013, at 9:20 PM, mortmain wrote:

    The drunken sailor is about to pass out.

  • Report this Comment On November 08, 2013, at 4:31 AM, shineridge wrote:

    Talk about the TWIGHLIGHT ZONE !!!! GDP growth means economic improvement, which SHOULD cause a market rally. QE does absolutely NOTHING for the actual economy !!! It all goes to the CRIMINAL BANKSTERS !! Of course, the TRUTH is there has been ZERO actual GDP growth !!! For every new company that opens up, or company that expands, some other company goes BELLY UP. Net GDP growth has been ZERO for several years. The economy is stagnating. Most new jobs so far this year have been PART time, LOW wage. The economy is in DEEP recession.

  • Report this Comment On November 09, 2013, at 12:31 AM, macarthur1 wrote:

    If the market goes down on great news about GDP and economic growth, then it's definitely time to end the Fed stimulus.

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