Federal Reserve's announcement to leave the interest rates unchanged sparks a global concern regarding the future outlook of global economic. The Wall Street particularly reacts negatively towards the news as most stocks are trading at a lower price forcing the index to close lower.
The decision made by the Fed is based on few factors including global economic slowdown, volatility in the financial market, and sluggish home inflation as reported by Reuters. Investors also take the latest decision by Fed as a cue that there will be a continuing decline on U.S corporate earnings.
According to Fed's officials, the decision was made as appreciation in U.S. Dollar and lower oil prices is expected to occur soon due to the slowdown. The Financial Post reported that the officials also stated that "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term."
Fed announcement is not the main cause of Friday's low index. According to Yahoo! News, the decline is also caused by expiring options on stock and indexes. Most options traded right now are nearing its expiry date causing panic sell and buy among investors resulting to high market volatility.
The outcomes of the meeting also cause the volatility index to jump to 22.28 percent from its average of 20 percent. This means that investors are worried about the effect from the unchanged rate such as a slowdown to the current bullish mode.
Data collected by Reuters shows that the S&P 500 is still in high value as it is currently trading at 15.6 times forward 12-month earning which is higher than the 10-year median reported of 14.7 times. Friday's trading also saw more than 10.9 billion shares traded, 2.8 times more than 20-days averages.
As Friday's session comes to an end, all major indexes recorded a loss in their trade. The Dow Jones Industrial Average fell 1.74 percent to close at 16,384.79. S&P 500 down 1.61 percent to 1,958.08 and Nasdaq Composite dropped 1.36 percent to 4,827.23.
The falling of energy and industrial company's shares also contributed to the decline. All majors companies in S&P sectors traded lower with energy index fell the most by 2.6 percent while the financials shed the least with 1.9 percent.
Another Fed meeting will be held by the end of October this year. It is unlikely that there will be any rate changes announced then as the third-quarter earnings are expected to decline 3.7 percent. However, investors are hoping that the Fed will change its decision during that meeting.
Join the Conversation