The latest twists in Europe's debt drama weighed down the stock market Tuesday, offsetting more good news on the U.S. housing market.
The latest twists in Europe’s debt drama weighed down the stock market Tuesday, offsetting more good news on the U.S. housing market.
The Dow Jones industrial average managed a gain of just four points, while other indexes closed slightly lower. Investors were focused on Cyprus, where the Mediterranean country’s lawmakers vote against a proposed bailout plan for banks that would have called for raiding the savings accounts of ordinary citizens, setting a precedent in Europe’s ongoing debt crisis. The vote happened 90 minutes before U.S. markets closed, at 2:30 p.m. Eastern time.
The plan was rejected – with zero votes in favor – even after being changed to lessen the burden on savers with lower balances. The vote leaves Cyprus’s bailout from international lenders in question. Cyprus is seeking $15.8 billion to fund its government and its banks. Without the money, both could collapse, and the country could wind up leaving the union of 17 countries that use the euro.
“The concern in the market is that they could default or they could be forced out of the euro zone and that would create a precedent,” said Alec Young, a global equity strategist with S&P Capital IQ. “The selling, though, is fairly contained, and that tells you most people think there will be some kind of compromise reached.”
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The Dow and other U.S. indexes started higher following a report of a surprisingly large increase in home construction in February. The index gained as much as 62 points in morning trading.
It turned lower at midday as Cyprus’ parliament began debating the contentious plan demanded by the country’s lenders to seize as much as 10 percent of the funds in savings accounts. The market steadied in the afternoon after the vote occurred.
The eurozone’s debt crisis still has the power to captivate stock global markets, but investors worry about it less these days after European Central Bank President Mario Draghi pledged last year to do “whatever it takes” to preserve the euro.
The Dow’s biggest fall this year came Feb. 25, when it lost 1.6 percent after the results of Italian elections left the country in political turmoil, endangering crucial economic reforms. Even that was less than sell-offs a year ago when borrowing rates spiked for Spain and Italy as investors lost confidence in the ability of those countries to service their debt.
On Tuesday, the Dow rose 3.76 points, or 0.03 percent, to close at 14,455.82.
Other major market indexes fell. The Standard & Poor’s 500 fell 3.76 points, or 0.2 percent, to 1,548.34. The Nasdaq composite fell 8.50 points, or 0.3 percent, to 3,229.10.
On Monday, the Dow fell 62 points after a weekend of drama as Cyprus’ leaders acceded to the demands from European lenders to seize depositors’ funds, which were met with outrage. While the reaction Tuesday was more muted, investors were still watching closely to see if the situation worsens.
“The situation in Cyprus is keeping everyone glued to their TVs,” Joseph Tanious, global market strategist at J.P. Morgan Funds, said before the vote.
Tanious says investors shouldn’t overreact to the news coming out of Europe, but instead take a step back and remember Draghi’s pledge. “Do not underestimate the power of the ECB,” said Tanious.
U.S. markets have been on a roll this year. The Dow is up 10.3 percent and broke through its previous all-time high on March 5, driven by strength in housing and a pickup in hiring. Strong company earnings and continuing stimulus from the Federal Reserve are also helping boost demand for stocks.
The S&P 500 is up 8.6 percent in 2013 and is 1.1 percent from its record close of 1,565.15, which was reached in October 2007.
The Federal Reserve opened its second policy meeting of the year Tuesday. On Wednesday, it will issue a policy statement and update its economic forecasts. Fed Chairman Ben Bernanke will give a press conference at 2:30 p.m. EDT. Economists and investors don’t expect the Fed to let up in its drive to keep stimulating the economy by keeping interest rates at historic lows.
“The Fed has clearly been a big push in this market, no question,” said Maury Fertig, chief investment officer at Relative Value Partners. “What the Fed has done has really helped the market recover….they’re not going to pull away prematurely.”
Investors are increasingly putting more money in stocks, according to a Bank of America Merrill Lynch survey, published Tuesday. The survey of fund managers showed that 57 percent of investors favored allocating money to stocks, the highest percentage in more than two years.
The yield on the 10-year Treasury note fell to 1.91 percent from 1.96 percent Monday. That shows investors continued to move money into low-risk assets. Two weeks ago the yield was 2.05 percent.
Among stocks making big moves:
- Lululemon fell $1.82, or 2.8 percent, to $64.08 after the company yanked its popular black yoga pants from store shelves after it found that the sheer material used was too revealing.
- Electronic Arts fell $1.56, or 8.3 percent, to $17.15 after the video game maker said its adjusted revenue fell 28 percent to $1.18 billion for the last three months of 2012. The figure was below Wall Street’s expectations. The company also said its CEO, John Riccitiello, will step down on March 30.