Fed QE Plans Throw Wrench into Stock and ETF Markets

June 21st at 4:30pm by Tom Lydon

The equities market and stock exchange traded funds stabilized Friday to cap a tumultuous week of heavy selling while Treasury yields hit a 22-month high and gold experienced its largest weekly decline in two years after the U.S. Federal Reserve signaled an eventual withdrawal from quantitative easing.

The stock markets extended their rally in the beginning of the week on positive economic data on the recovering housing market but quickly soured as traders reacted to the FOMC’s plans to withdraw stimulus if and when unemployment hits the 6.5% mark and the economy continues to improve.

“The Fed’s action represents the continuing transition that is occurring in the global economy following the financial downturn and the recovery period that has followed,” Ron Florance, managing director of investment strategy at Wells Fargo Wealth Management, said in a USA Today article. “We expect financial markets to respond with a measure of volatility as the ‘normalization’ process unfolds.”

In the fallout, equities plunged in volatile trading, with the S&P 500 dipping below 1,600 and the Dow crossing its 15,000 level. Gold futures also plunged below $1,300 per ounce, hitting a near-three-year low.

“This week, we’ve learned the market is still incredibly responsive to macro elements and data points,” Mitch Rubin, who oversees about $200 million as chief investment officer at RiverPark Advisors LLC, said in a Wall Street Journal article. “It’s a reminder that, if you’re going to be a trader, these things have become very prominent, where five or 10 years ago, while interest-rate policy is always very important, the daily musings of the Fed didn’t drive 2% or 3% moves in the S&P 500.”

Looking at the major U.S. equity indices, the S&P 500 was on track for a weekly decline of 2.0% in afternoon trade Friday, the Dow lost 1.7% and the Nasdaq Composite was 1.0% higher.

Meanwhile, benchmark 10-year Treasury yields traded as high as 2.51% Friday, with the iShares Barclays 7-10 Year Treasury Bond (NYSEArca: IEF) down 2.0% over the past week.

Gold futures rose slightly Friday, trading around $1,295 per ounce. The SPDR Gold Trust (NYSEArca: GLD) experienced a 7.6% drop over the past week.

Top performing non-leveraged ETFs over the past week include the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) up 11.1%, db-X In-Target Date Fund (NYSEArca: TDX) up 5.7% and ProShares VIX Mid-Term Futures ETF (NYSEArca: VIXM) up 5.6%.

The worst performing non-leveraged funds over the week include the Global X Silver Miners ETF (NYSEArca: SIL) down 18.3%, Junior Gold Miners ETF (NYSEArca: GDXJ) down 18.2% and Global X Gold Explorers ETF (NYSEArca: GLDX) down 18.1%.

In next week’s economic data, look for reports on durable goods orders and new home sales numbers Tuesday.

Full disclosure: Tom Lydon’s clients own GLD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.