Stock rally pauses as investors raise concerns over Fed's dim outlook
NEW YORK — The stock market paused on Thursday as investors tried to figure out what to do as a result of the Federal Reserve's decision to hold steady on its stimulus for the economy.
The Dow Jones industrial average and Standard & Poor's 500 index pulled back from their record highs the day before. Gold, historically a haven for nervous investors, had its biggest one-day jump since the onset of the financial crisis in September 2008.
Many investors had expected the central bank to scale back its $85 billion in monthly bond purchases, but the Fed said it first needed to see more evidence that the economy was improving.
The question is whether stocks can continue their strong run-up, given the Fed's dimmer outlook on the economy. The stock market is up 21 percent for the year, and 155 percent since a recession low in March 2009. And after a tough August, the S&P 500 has risen 11 of the last 13 days.
The rally on Wednesday extended that surge but raised a deeper concern for Julius Ridgeway, an investment adviser at Medley Brown, a financial-advisory firm in Jackson, Miss.
Ridgeway said the rally showed that investors believe the economy still needs the Fed's help, even after more than two years of modest economic growth.
“The market wants the economy to be healthy and on life support, and it can't have both over the long term,” he said.
The Fed's bond buying is designed to keep interest rates low, with the goal of stimulating the economy by encouraging borrowing and lending.
Chairman Ben Bernanke and other voting members of the Fed telegraphed throughout the summer that the central bank was considering pulling back on the program, if the economy was healthy enough.
Now, with the Fed delaying its pullback, the market could enter a new period of uncertainty, rarely good for sustaining a stock rally.
The market is back to its mentality in May, when investors were trying to parse every data point from the Fed to figure out what it was planning to do, said Wayne Wilbanks, chief investment officer at Wilbanks, Smith, Thomas in Norfolk, who manages about $2.4 billion in assets.
“The Fed buttered the market up. It was a done deal,” he said. “It was a huge policy mistake.”
The Fed also cut its economic growth forecasts for this year and 2014. Bernanke warned that the upcoming debt ceiling and budget fights between the White House and Congress “may involve additional risks to financial markets and to the broader economy.”
On Thursday, the Standard & Poor's 500 index fell three points, or 0.2 percent, to 1,722.34. The Dow Jones industrial average slipped 40 points, or 0.3 percent, to 15,636.55.
The Nasdaq composite index rose six points, or 0.2 percent, to 3,789.38.
The price of gold surged $61.70, or 4.7 percent, to $1,369.30 an ounce.
The yield on the 10-year Treasury note rose to 2.75 percent from 2.69 percent late Wednesday.
Despite Thursday's minor pullback, September has been great for the market. Stocks are on pace to have their best month in nearly two years.
The Dow set an all-time high of 15,767.93 on Wednesday after the Fed's decision. The S&P also closed at a record high — 1,725.52
However, Wilbanks and other investors believe the market cannot go much higher, particularly with an uncertain earnings season starting in a few weeks and the looming political fights in Washington.
“We're being very careful about U.S. equities,” he said.