S&P 500 Falls From Record Highs on Fears of Tapering

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) is being led down by the financial sector as concerns rise that the Federal Reserve could soon begin to pare back its quantitative-easing program. Those worries were sparked by comments today from multiple Federal Reserve bank presidents. As of 1:30 p.m. EST the Dow is down 40 points to 15,740. The S&P 500 (SNPINDEX: ^GSPC  ) is down five points to 1,766.

Travelers  (NYSE: TRV  )  is leading the Dow's fall, down 2.1%. In terms of effect on the Dow, however, smaller drops by Visa (NYSE: V  ) and Goldman Sachs (NYSE: GS  )  are exerting similar downward pressure, given their high share prices. The absurd way the Dow Jones Industrial Average is structured is just one of the reasons the index is a poor measure of the U.S. market.

Financials are leading the Dow and S&P 500 downward as investors sell off stocks in anticipation of a possible tapering of the Fed's large-scale asset purchases at its meeting next month. Banks have been prime beneficiaries of the Fed's stimulus efforts, which are a combination of a zero-interest-rate policy and the Fed's $85 billion-per-month long-term asset purchases.

Investors have become concerned over the possible slowing of those asset purchases. Today, Federal Reserve Bank of Atlanta President Dennis Lockhart said on Bloomberg Radio that "some discussion of tapering could well take place." It should be noted that Lockhart is a nonvoting member this year.

Federal Reserve Bank of Dallas President Richard Fisher, at a conference in Melbourne, said, "The balance sheet is $4 trillion and there are limits to what the Federal Reserve can do." He went on: "Our balance sheet has become bloated, and at some point we will have to taper back on the pace of purchases, but that doesn't mean we'll stop. We'll have less accommodation as opposed to the current $85 billion a month."

Even if the Fed were to cut all of its asset purchases, the central bank is doing a lot to stimulate the economy with its zero-interest-rate policy. That said, more signs of tapering will continue to weigh on the market, and a full stop would likely see the market drop.

The bond market was closed yesterday for Veterans Day; it sold off some today on the news, with the yield on the 10-year Treasury now at 2.77%.

10 Year Treasury Rate Chart

10 Year Treasury Rate data by YCharts.

While most of the major banks and insurance companies are down today on the news, at least one bank is trading higher.

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10/21/2014 11:43 AM
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TRV $93.99 Up +0.79 +0.85%
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