Fed's readiness to reduce stimulus sinks stocks

Associated Press
FILE - In this Tuesday, Nov. 19, 2013, file photo, specialists John Alatzas, left, and William Geier, right, work at their posts on the floor of the New York Stock Exchange. World stocks were dimmed Wednesday Nov. 20, 2013 by a weaker outlook for global growth. Markets also braced for the release of Fed minutes that could spark a new wave of speculation about when the central bank will reduce its monetary stimulus. (AP Photo/Richard Drew, File)
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FILE - In this Tuesday, Nov. 19, 2013, file photo, specialists John Alatzas, left, and William Geier, right, work at their posts on the floor of the New York Stock Exchange. World stocks were dimmed Wednesday Nov. 20, 2013 by a weaker outlook for global growth. Markets also braced for the release of Fed minutes that could spark a new wave of speculation about when the central bank will reduce its monetary stimulus. (AP Photo/Richard Drew, File)

NEW YORK (AP) — New signs that the Federal Reserve is getting ready to reduce its extraordinary support of the U.S. economy sent stock and bond prices lower on Wall Street Wednesday.

Minutes from the Federal Reserve's latest meeting on Oct. 29-30 showed that the U.S. economy was improving steadily enough to warrant a reduction in stimulus "in coming months." The Fed has been buying $85 billion every month in Treasury and mortgage-backed bonds, which keeps long-term interest rates artificially low and makes stocks seem inexpensive in comparison to bonds.

The Fed's economic stimulus program has been a key driver of the stock market's 25 percent surge this year, along with rising corporate profits and a recovering U.S. economy. Investors already know the Fed will reduce on its economic stimulus eventually, yet they remain highly sensitive to concrete signals that the pullback is imminent and worry that the Fed might withdraw its support before the economy is ready.

Stock indexes fell after the Fed released the minutes from the meeting at 2 p.m. Eastern time. The Dow Jones industrial average was down 80 points as of 3:30 p.m., or 0.5 percent, at 15,883. It was up 20 points shortly before the minutes were released.

The Standard & Poor's 500 index was down eight points, or 0.5 percent, to 1,779. The Nasdaq was down 17 points, or 0.4 percent, to 3,914.

Bond prices also declined. The yield on the benchmark U.S. 10-year note rose to 2.80 percent from 2.71 percent just before the minutes were released. That's the highest since Sept. 17. Bond yields rise when demand for them falls.

"Investors need to be prepared to see the Fed wind down its program in the long term," said Kristina Hooper, head of U.S. investment strategies for Allianz Global Investors.

The Fed's next policy meeting is scheduled for Dec. 17-18. Investors are split on whether the bank will vote to pull back its bond purchases, or "taper" them, as it is sometimes called on Wall Street. The Fed surprised investors at its Sept. 17-18 meeting by keeping the bond purchases in place, despite widespread predictions that it would start to wind the program down.

With Wednesday's decline, the S&P 500 is down 1 percent for the week. The S&P 500 hasn't had a weekly loss since the week ending Oct. 4.

Hooper and other market watchers said they would not be surprised if the market continued to fall. "It would not be unreasonable for investors to step back here," said Ron Florance, deputy chief investment officer for Wells Fargo Private Bank.

Investors were also looking over news from the retail industry.

J.C. Penney led the S&P 500 index higher with an 8 percent gain. Despite reporting a loss in the third quarter, there were hopeful signs for the long-struggling store chain heading into the holiday shopping season. The company said its sales rose in October for the first time since December 2011. The stock rose 70 cents to $9.41. It's still down 52 percent this year.

Lowe's, the home improvement store chain, fell $2.52, or 5 percent, to $47.91. Lowe's earned 47 cents per share in the latest quarter, a penny short of what analysts were looking for. Lowe's was outshone by competitor Home Depot, which reported a 26 percent surge in net income the day before.

The holiday shopping season is a make-or-break time for U.S. retailers, and more broadly the U.S. economy. Sales during November and December can account for up to 40 percent of the annual revenue for store operators.

So far, there's reason to be hopeful. The National Retail Federation, the nation's largest retail trade group, expects holiday sales to increase 3.9 percent to $602.1 billion this year.

Separately, the U.S. Commerce Department said Wednesday that U.S. retail sales rose 0.4 percent in October. That was much better than the 0.1 percent increase economists had predicted, according to FactSet, a financial information provider.

"Consumers seem to be in a better mood, which will be good for the overall economy," Florance said.

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