Bank of America Corp (BAC), Cisco Systems, Inc. (CSCO): Why Stocks Are Plummeting

Blue-chip stocks are down sharply this afternoon after a handful of worse-than-expected economic reports sent fear throughout Wall Street. With roughly an hour left in the trading session, the Dow Jones Industrial Average is off by 178 points, or 1.17%.

If you were to read the market recaps from the nation’s largest financial news sites, you’d be excused for blaming today’s decline entirely on the Federal Reserve — or, rather, on speculators’ fears that the Fed will soon take its foot off the proverbial gas pedal.

The promo for a Reuters’ article reads: “Wall Street continued to be bothered by concerns that the Federal Reserve might slow the pace of its economic stimulus program.” The Wall Street Journal chimed in with: “U.S. stocks continued their broad sell-off in midday trading, as investors were rattled by steep declines in overseas markets and the specter of tightening central-bank policy.” And Bloomberg News followed suit by noting: “Stocks fell while commodities rose for a third day as investors weighed prospects for U.S. economic growth and the Federal Reserve’s stimulus plans.”

There’s little doubt that uncertainty over monetary policy is weighing on stocks. However, as I noted, there were also a number of economic reports that fell short of expectations. First and foremost, as you can see in the chart below, private-payroll processing company ADP reported this morning that nongovernment employers added 135,000 jobs last month. Even though I find the expectations of analysts and economists to be completely lacking in substance or merit, it’s nevertheless worth noting that the “consensus estimate” called for growth of 170,000 jobs.

According to Carlos A. Rodriguez, president and chief executive officer of ADP:

The majority of new jobs in May came from the service-providing sector, which added a total of 138,000 jobs, while the goods-producing sector recorded a loss of 3,000 jobs. Notably, a gain of 5,000 jobs in the construction industry during May was offset by a decline of 6,000 lost jobs in the manufacturing industry.

In addition to this report, which was unquestionably the most important to be released today, two other data releases are worth pointing out. First, the Institution for Supply Management announced that its service-sector index edged up to 53.7% in May from 53.1% in April. This supports the ADP report, which found that the service sector accounted for all private-sector job growth last month. And second, the Department of Commerce released (link opens PDF) data showing that factory orders rose by 1% last month thanks to higher demand for automobiles and aircraft.