The S&P 500 fell 0.7% on Sept. 20 as Fed Bank of St. Louis President James Bullard said policy makers may decide to reduce their monthly bond purchases at the meeting in October.
“The more people who speak from the Fed in one day, the less clarity there is,” Richard Sichel, who oversees about $1.9 billion as chief investment officer at Philadelphia Trust Co., said by phone. “People will be hanging at every word that’s said for more clues about our monetary policy.”
Even as investors focus on the Fed’s policies, a risk is rising from another corner of Washington. Hardening positions on the federal budget and borrowing limit, and recent political setbacks suffered by both President Barack Obama and Republican congressional leaders as they go into the fight, are raising the odds of a government shutdown, debt default or near-miss that could roil equities markets.
Forty% of global investors surveyed in a Sept. 10 Bloomberg poll said they would pull back on U.S. markets in the event of a government shutdown, which many economists say would be less damaging than a debt default.
“We are in for another ugly confrontation,” said Howard Ward, the chief investment officer for growth equity at Rye, New York-based Gamco Investors Inc., which oversees about $40 billion. “Even though everyone knows the impasse will be short- lived, it is a sad reminder of how dysfunctional Washington has become. It will be a catalyst for taking profits after the recent run-up.”
Outside the U.S., German Chancellor Angela Merkel was re- elected yesterday, winning the biggest tally since Helmut Kohl’s post-reunification victory of 1990. In Asia, the preliminary reading of a purchasing managers’ index for Chinese manufacturing compiled by HSBC Holdings Plc and Markit Economics climbed to 51.2 in September from 50.1 in August. That beat the 50.9 median estimate of economists surveyed by Bloomberg News.
U.S. equities will likely extend their declines this week, if history is any guide, after the Sept. 20 expiration in futures and options contracts, according to MacNeil Curry, a New York-based technical strategist at Bank of America Corp.
When the quarterly expiration process known as triple witching occurs in September, the following week has resulted in losses 68% of the time for the S&P 500 since equity index futures were created in 1982, according to a study by Curry. In the past 10 years, the S&P 500 has fallen 80% of the time in the week after September triple witching, averaging a decline of 1.9%, the data show.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumped 8%, the most since Aug. 27, to 14.17. The measure is still down 21% this year.
Eight of 10 S&P 500 industry groups declined, with financial shares falling 1.2% as a group for the largest drop. Utility and technology shares were the only gainers, rising 1% and 0.5%, respectively.
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