U.S. Bull Market Ends as Fed Money Pump Runs Dry

Stocks are having their worst month in three years as the Federal Reserve ends its quantitative easing program, which expanded the supply of money and helped stocks rise 30% in 2013.

Stocks are having their worst month in three years as the Federal Reserve ends its quantitative easing program, which expanded the supply of money and helped stocks rise 30% in 2013.

Stocks have fallen over 8% from their all-time high reached just a month ago, with the S&P 500 erasing all gains for the year and the Dow Jones seeing five days of 100 point losses in the last seven days of trading. At the same time, the Federal Reserve is ending its quantitative easing program, which pushed down bond yields and encouraged investors to buy more equities throughout 2013, helping equity indexes reach new highs.

Deflationary Pressures from Oil, Retail Sales

NYMEX crude oil fell to 81.7 in mid-day trading, down around 20% from its high for the year amidst a glut in supply. Gas prices have fallen to $3.17 per gallon on average as a result, and analysts expect gas to fall below $3 per gallon in some parts of the country.

While lower gas prices are likely to encourage greater consumer spending and more domestic economic activity in the U.S., lower prices are also seen as a broader risk to global economic growth because declining oil prices will remove incentives for oil production, research, and development. Low oil prices can also cause recessionary pressures in oil and energy dependent economies throughout the Middle East, Australia, and Russia.

Lower oil prices have not yet translated into better retail sales in the United States, as stagnant wages and growing employment instability have kept aggregate demand low and consumption muted. The Census Bureau reported Wednesday that retail sales fell 0.3% in September on a month-by-month basis, but were up 4.3% from a year ago. The decline in retail sales was worse than analysts had expected, with low gasoline demand and sluggish sales for retail and restaurants impacting results.

Analysts worry that low oil prices may be creating a deflationary spiral in which consumers hold off spending on the expectation that prices will go lower, in turn causing revenues and overall GDP to decline. U.S. Treasuries reflected the downbeat inflation expectations, as 10-year yields dipped below 2% in trading on Wednesday as traders bet that economic growth would become more muted.

Europe Equities See Broad Declines

Economic turmoil is expected at an accelerating pace in Europe, where equity markets have turned sharply negative. The French CAC 40 fell over 3.6%, as did the Euro Stoxx 50 index. Both the UK FTSE 100 and German DAX fell over 2.8% on Wednesday, with some analysts believing the bottom is still to come. The Eurostoxx 50 is down over 5.4% for the year.

The selloff in European stocks was driven by expectations of a growth deceleration and perhaps a eurozone-wide recession as German savers continue to halt liquidity to the broader currency union. Yields on peripheral euro nations rose, with Greece’s 10-year yield rising to 7.83% in trading. Italian and Portuguese long-term debts have also risen in intraday trading. Yields are rising in European markets as investors become increasingly concerned that the so-called PIIGS countries, particularly Italy and Greece, could default on their debt as they run out of euros due to a lack of liquidity. 

The threat of a lack of liquidity is rising as the European Central Bank struggles with German policymakers on how to produce a quantitative easing program to expand the EU’s monetary base.