Fed exit fears rattle Wall Street

Written By limadu on Kamis, 20 Juni 2013 | 23.53

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NEW YORK (CNNMoney)

Federal Reserve chairman Ben Bernanke offered some of the most explicit guidance to date Wednesday about when the central bank could begin tempering its stimulus policies.

Depending on how the economy performs, Bernanke said the Fed could begin tapering its bond buying later this year and end the program some time in 2014. At the same time, he stressed that if economic growth or hiring fall short of the central bank's outlook, the Fed would adjust its policies.

While this is what most economists had predicted, investors seemed surprised to hear Bernanke spell it out in such detail.

"He offered more clarity and transparency than many had expected," said Art Hogan, managing director at Lazard Capital Markets.

The Fed has been a major driver of the bull market over the past few years, and traders say the shift in policy will continue to fuel volatility in the months ahead. The VIX (VIX), a benchmark of investor anxiety, jumped more than 13% Thursday. And CNNMoney's Fear & Greed Index slid back into extreme fear.

"I think volatility is the new norm as investors in all asset classes try to re-price what the world looks like in the absence of quantitative easing," said Hogan. "That's not an easy thing to do."

The Dow Jones industrial average tumbled more than 200 points, or 1.4%, midday Thursday. (Track the Dow 30)

The S&P 500 and the Nasdaq sank 1.5%.

Meanwhile, bond yields continued to spike, with the 10-year Treasury yield rising as high as 2.46%. That's its highest level since August 2011. Gold prices plunged and the dollar rallied against the euro and the yen.

Related: Dollar headed for 'multi-year rally'

Major European markets fell by more than 3% in afternoon trading. Asian markets also saw hefty losses after HSBC's flash purchasing managers' index for June showed Chinese manufacturing activity at a 9-month low. Hong Kong's Hang Seng and the Shanghei Composite both shed nearly 3%.

What's next for stocks? Dan Greenhaus, chief market strategist at BTIG in New York, said the initial reaction to Bernanke's comments was overdone. But he said a period of choppy trading is to be expected following the strong gains stocks booked earlier this year.

"I wouldn't be surprised if we drifted lower and trade sideways for the next few months," said Greenhaus.

Related: Bernanke's power over your money

In economic news, the government said the number of jobless claims rose more than expected in the latest week. A measure of manufacturing activity in the Philadelphia area surged to a two year high in June. Meanwhile, the National Association of Realtors said existing home sales in May rose 4.2% to an annual rate of 5.18 million, slightly better than expected.

Despite the housing data, shares of homebuilders were among the worst performers. PulteGroup (PHA), D.R. Horton (DHI) and Lennar (LEN)were all down sharply.

The sharp drop in gold prices weighed on shares of mining companies, including Newmont Mining (NEM, Fortune 500) and Freeport-McMoRan (FCX, Fortune 500).

On the corporate front, drugstore chain Rite Aid (RAD, Fortune 500) swung to a profit but revenue declined in the latest quarter.

Tech giant Oracle (ORCL, Fortune 500) is up in the afternoon. To top of page

First Published: June 20, 2013: 9:42 AM ET


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