How the Fed Could Kill the Stock Market

NEW YORK (The Street) - Fund managers warn of further turmoil for global equity markets after the Federal Reserve cut its stimulus program further on Wednesday, squeezing the supply of 'easy money' to indebted emerging economies.

US equity markets dipped and ten-year Treasuries rose in response to the widely expected move, with bond purchases reduced by a further $10 billion to $65 billion a month. The action was in-line with the Fed's December statement to wind back its massive stimulus program as growth improves in the world's largest economy.

Cam Albright, director of asset allocation at Wilmington Trust Investment Advisors, noted the Fed's mention of a pick-up in household spending and business investment. "Those are core elements of GDP which will help stronger growth in future," Wilmington-based Albright said in a phone interview. 

"The economy is getting better and that will be beneficial for US financial markets, but right now, traders are concerned about the international ramifications."

Albright said the move would feed further uncertainty in global equities, which have been bolstered by global stimulus programs and rocked by recent turmoil in emerging markets. Emerging markets were not mentioned in the Fed's statement, with many mangers noting it rightly focused on the domestic economic outlook. Wilmington Trust Investment Advisor is a unit of Wilmington Trust, which has $79 billion in assets under management.

Uri Landesman, president of Platinum Management, said the move showed confidence from the central bank that the US economy could start to 'stand on its own'. But he noted stimulus had been a crucial support for equities since the global financial crisis, and expects the move to trigger further uncertainty.

"It's going to be a wild year and I think we're headed down to 1,700 (for the S&P) as the market is priced to perfection," the New York based manager said in a phone interview. Landesman said risk aversion had crept back into equities, with emerging markets to suffer further amid a likely correction for the S&P 500. Platinum Management has $1.3 billion in assets under management.

The central bank did not change its view on general improvement in the US economy, noting that "labor market indicators were mixed but on balance showed further improvement".

The S&P/500 and Dow Jones Industrial Average were in the red, but regaining losses in afternoon trade, after dipping sharply in response to the Fed's move.

-- By Jane Searle in New York

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