NEW YORK - Twitter Inc. wowed investors with a 73 percent surge on its first day of trading Thursday. The broader market, however, had its worst day since August as traders worried that the Federal Reserve could cut back on its economic stimulus.
The cause of that worry was a surprisingly strong report on U.S. economic growth in the third quarter. That led investors to believe the Fed could start pulling back as soon as next month, sooner than many anticipated.
The Standard & Poor’s 500 index fell 23.34 points, 1.3 percent, to 1,747.15. Even after Thursday’s drop, the index is still up 22.5 percent this year. The last time the benchmark index had a bigger gain for a whole year was in 2009.
The Dow Jones industrial average retreated from the record high it set the day before, giving up 152.90 points, or 1 percent, to close at 15,593.98.
The Nasdaq composite fell 74.62 points, or 1.9 percent, to 3,857.33.
After 33 record-high closes this year, an increasing number of investors believe the stock market has become frothy and is ready for a pullback. The first-day surge in Twitter, a company that has never made a profit, was the latest example.
“The market had rallied a heck of a lot, and to justify further gains we really need to see the economy improving or corporate earnings picking up,” said Alec Young, global equity strategist with S&P Capital IQ.
Twitter soared $18.90 to $44.90. Twitter priced its initial public offering Wednesday night at $26 per share.
What got traders concerned about a pullback by the Fed was a report from the government early in the day that the U.S. economy expanded at an annual rate of 2.8 percent in the third quarter, up from 2.5 percent in the previous quarter and more than economists anticipated.
“This will certainly fuel expectations that the underlying economy is stronger than the mixed data have suggested,” said Quincy Krosby, a market strategist for Newark, N.J.-based Prudential Financial Inc., which oversees more than $1 trillion of assets. “The question is whether or not the markets can accept good news as good news or whether we’re still on the trajectory where good news is bad news. We’re going to reach an inflection point in the market where good news is in fact good news.”
The robust growth “certainly raises the possibility of the Fed pulling back in December,” said Peter Cardillo, chief market economist at Rockwell Global Capital. “The Fed is going to test the water.”
The Fed is buying $85 billion of bonds every month to hold down interest rates and encourage hiring and borrowing. The program has also helped drive the stockmarket rally by lowering bond yields, making them less appealing to investors.
Another key economic report - the government’s jobs survey for October - comes out today. Economists forecast that U.S. employers added 122,000 jobs, down from 148,000 in September, reflecting a 16-day partial shutdown of the federal government.
The jobs report “has people a little on edge” said Erik Davidson, deputy chief investment officer of Wells Fargo Private Bank. “We’re expecting a modest number but it’s really hard to say what the impact of the government shutdown will be.”
The market will be volatile, said Ernie Cecilia, chief investment officer at Bryn Mawr Trust Co. in Bryn Mawr, Pa. His firm oversees about $7 billion. “You had some good economic news [Thursday] and we’ll see what the payrolls numbers are today. The fear is that with better-than-expected economic numbers, tapering will commence sooner rather than later.”
In government bond trading, the yield on the 10-year Treasury note fell to 2.60 percent from 2.64 percent.
Information for this article was contributed by Lu Wang and Nick Taborek of Bloomberg News.
Business, Pages 32 on 11/08/2013