U.S. stocks slumped as investors speculated the Federal Reserve’s refusal to raise rates bespeaks larger concerns about the strength of the global economy.

The Standard & Poor’s 500 Index lost 1.2 percent to 1,973.94 at 11:10 a.m. in New York. The gauge pared its gain for the week to 0.6 percent. The Dow Jones Industrial Average dropped 238.61 points, or 1.4 percent, to 16,436.13. The Dow Jones Transportation Average slumped 1.5 percent.

“Some investors wanted them to rip the Band-Aid off and get the first one done. Then we wouldn’t have to obsess about it for the two weeks before each meeting,” said Eric Green, director of research and senior managing partner at Penn Capital, which oversees $4 billion in Philadelphia. “There’s some concern that the Fed sees something we’re not seeing in the data.”

Some futures and options on stocks and indexes expire today in a process known as quadruple witching, which may increase stock volatility. Trading in S&P 500 companies was 38 percent above the 30-day average.

David Fuller's view

Stock markets remain in the May through October period of seasonable underperformance.  Widespread corrections have occurred in response to slow global GDP growth and concern over China following its own economic slowdown and inability to regulate its financial markets effectively.  Investor’s nerves were further frayed by the occurrence of Wall Street’s overdue 10%-plus correction. 

It is a characteristic of human nature to extrapolate trends, in both directions.  Investors do this to justify their most recent decisions.  High-frequency trading systems can identify short-term supply-demand imbalances in microseconds, and then front run trends in active markets. 

Nervous markets sow doubts and induce paranoia.  A good example following the US Federal Reserve’s decision not to raise rates yesterday is today’s question: ‘Does the Fed know of some problem that we are not seeing in the data?’

The short answer to this question is no.  Instead, the Fed’s questions for itself are: Do we need to raise interest rates which could easily push the US Dollar higher, creating an additional headwind for US multinational corporations, while also increasing pressures on countries that borrowed the US currency when it was lower?  Moreover, do we need to raise rates when US inflation remains well below our target of 2%?  Lastly, is the labour market so tight that we need higher rates?

I suggest that the answer to these questions is a resounding NO.  Some people fret that the Fed has no further ammunition for the next crisis, if it does not raise rates now.  That is an old argument which underestimates the Fed’s flexibility in terms of monetary resources. Moreover, premature rate increases would only invite the problems that they are trying to avoid.  The Fed has decided to err on the side of caution, especially as there is no compelling reason to raise rates at this time.  I think that was a sensible decision.

This is discussed in more detail in the Audio.