Stocks plunged and bond yields continued to fall Thursday afternoon after the Federal Reserve's announcement of a $400 billion securities swap and a disappointing initial jobless claims report.
The Dow Jones Industrial Average dropped mid-day over 371 points to 10,753, or 3.3 percent, after a weak opening. The S&P 500 fell 3 percent and tech-heavy Nasdaq index fell about 2.8 percent.
The Labor Department announced this morning that applications for unemployment claims fell 9,000 last week to 423,000, higher than the 420,000 claims economists expected.
Phil Orlando, chief equity strategist with Federated Investors, said investors were ignoring the silver lining this morning and focusing on the negative, mainly deeper fears of a sovereign default in Greece and its effect on the Eurozone.
Orlando said it was good news that jobless claims fell, though 400,000 claims or lower would indicate a healthier economic environment for employment.
"It doesn't bode for a great number in September, but hopefully it will be better than August which was zero," he said. The U.S. economy added no jobs in August, leaving the unemployment rate at 9.1 percent.
He said the claims figures and a drop in stocks in European and Asian markets contributed to the stock market's tumble.
Investors also seemed to ignore positive news at 10 a.m. eastern time that U.S. leading economic indicators increased more than expected in August. The research group, the Conference Board, announced that its economic outlook for the next three to six months increased 0.3 percent, following a 0.6 percent rise in July.
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"What these leading economic indicators tell us is that September's GDP report and jobs report have the potential to improve, but the market is ignoring those data points," Orlando said.
Stock trading instead seemed to respond to the Federal Reserve's announcement that "economic growth remains slow" on Wednesday. The Federal Open Market Committee announced the intent to purchase $400 billion of long-term securities by the end of June 2012 and the sale of an equal amount of short-term securities.
"Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased," the committee said in a statement at the conclusion of its two-day meeting.
Orlando said the stock markets had rallied after the Federal Reserve completed its annual meeting in Jackson Hole, Wyoming late August when chairman Ben Bernanke expressed some optimism about the economic recovery. The rally started to falter until about two days ago, in part over rumored action by the Federal Reserve.
Orlando said the Federal Reserve did a good job "telegraphing" its "Operation Twist," which aims to decrease long-term interest rates further than already low levels.
"The stock market would price in what they expect the Fed to do ahead of when they do it," he said. "Buy the rumor, sell the news."
And the Fed's move is already working, at least according to the 10-year Treasury yield. The yield fell below 1.8 percent, the lowest level since the 1940s. But will the low yield help stimulate the economy?
"The point is: how much incremental economic activity are we going to see with the 10 year yield at 1.75 versus 2 percent?" he asked.
"The problem is the reluctance of banks to lend money to credit-worthy small businesses and personal borrowers," Orlando said. "Yes, you have lower interest rates but is that going to increase lending to credit borrowers?"
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