Stocks around the world extended their petulant selloff today, with the Standard & Poor’s 500-stock index down 1.9 percent in the first hour of trading, four business days after Ben Bernanke said the economy was improving so much the Federal Reserve will eventually wind down its stimulus policies.
Bonds also fell in the U.S. and around the world. The yield on 10-year Treasuries rose to 2.616 percent, which means prices went down; the rate is still near a record low, but has climbed more than a full percentage point since July.
Here’s an illustration of how broad, and hot-blooded, this rout is: Gold is sinking today, too, down as much as 1 percent after big losses last week. That’s not how things are “supposed” to work—gold is said to be a store of value in times of economic distress.
Investors are unhappy with Bernanke’s June 19 press conference, when he listed multiple reasons for optimism in the U.S. economic recovery and said the Federal Reserve now foresaw an end to its $85 billion of monthly asset purchases. The Fed’s bond purchases have kept yields down, pushing investors into taking more chances on things like stocks and emerging-market debt. The easy money has been a big driver of the gains in stocks over the last nine months—the S&P has climbed 9 percent since the program was announced in September—and traders are fearful of it being taken away, even if Bernanke says it will only happen as long as the economy continues to strengthen on its own. In theory, a strong economy means high-performing stocks and stable interest rates. In reality, investors are saying to hell with all of them.
The distrust is merging with bad news out of China. Concerns about slowing growth there have led Chinese equities to officially enter a bear market, down more than 20 percent since their last peak, in February.
At his press conference last week, Bernanke took pains to emphasize that the Fed purchasing less each month is not the same as purchasing nothing at all, and is definitely not the same as selling assets back into the market. The central bank is not slamming on the brakes, he said.
“To use the analogy of driving an automobile,” he explained, “any slowing in the pace of purchases will be akin to letting up a bit on the gas pedal as the car picks up speed, not to beginning to apply the brakes.” If Bernanke was speaking to investors as if they were children, it might have been because he knew they might act like them.