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Stocks do U-turn after Fed cites high prices

The Dow pulled a U-turn Wednesday, giving up a nearly 200-point gain to finish down more than 40 points. Blame the downside reversal in stock prices on the Federal Reserve.

The minutes of the U.S. central bank’s mid-March meeting, when it hiked interest rates for the second time in three months, surprised investors. Why? Because the Fed discussed its plans to start paring back its $4 trillionplus balance sheet. Later this year it plans to start paring back its holdings of U.S. Treasury bonds and mortgage-backed securities that it built up during and after the Great Recession in an effort to keep borrowing costs low. The Fed isn’t yet talking about outright sales of its bonds, but rather initially reducing its fixed-income holdings by stopping or paring back additional bond purchases that had been funded by reinvesting proceeds of its maturing bonds.

Several Fed members also described stock prices as “quite high relative to standard valuation measures.” The Fed cited a “significant correction,” or stock market downturn, as one downside risk to its overall upbeat outlook. The Standard & Poor’s 500 stock index is currently trading at more than 20 times 2016’s earnings, well above its average priceto-earnings ratio of around 15.

The one-two punch of the Fed warning of too-high stock prices and the prospect of less Fed stimulus gave investors reason to take profits and reassess the market’s next move.