Despite months of direct and indirect warnings that the strengthening economy will need less support from the Federal Reserve, the equity markets today fell in reaction to some positive jobless data.
“It's kind of a good-news-is-bad-news scenario, and the market is really paying attention to what the Fed is doing rather than paying attention to fundamentals,” said Zoe Brunson, director of investment strategies at Genworth Wealth Management.
The S&P 500 opened Thursday down nearly 1.5% and hovered in that range for most of the day. Most market watchers pegged the sudden dip to an initial jobless claims report that showed a drop of 15,000, to 320,000, which is the lowest level since October 2007.
The stock market sell-off also was fueled by new evidence that inflation is picking up, as measured by the Consumer Price Index, which gained 0.2% to reach 2%.
The Fed has set an inflation target of 2.5% as part of its plan to start reducing the pace of Treasury bond purchases of $85 billion per month.
As stocks fall during the day, the yield on the closely watched 10-year Treasury bond hovered above 2.7%, for a one-day spike of more than 1.8%.
“The whole issue here is nobody is clear if the real economy is ready to take the baton from the Fed without stumbling, and a lot of folks aren't willing to wait and see, so they're going to sell now,” said Jim Ball, president of Ball Financial Services Co.
“There is potentially a big gap between the real economy and the economy that the Fed has created through quantitative easing,” he said. “Many of us hope the numbers are real, but perhaps there's more pain out there.”
As Ms. Brunson pointed out, part of the problem with focusing on the Fed's next move as opposed to traditional market fundamentals is that the its actions are being viewed through the prism of often-conflicting data.
The housing market, for example, is considered to be the midst of a robust recovery, as illustrated by average monthly mortgage payments on median home sales at nearly $1,100, a level not seen since 2008.
But personal income, as measured on a five-year growth pattern, remains in negative territory.
“It's a divergence,” Ms. Brunson said. “We see that jobless claims are down, but we're still not seeing wage growth or personal income growth.”
Thomas Chapin, chief investment officer at Mill Creek Capital Advisors LLC, called today's market decline a repeat of what happened earlier this summer when Fed Chairman Ben S. Bernanke indicated that the economy is likely on track for tapering of the quantitative-easing program to begin next month.
“Now with jobless claims numbers today looking better, and with inflation within shouting distance of the 2.5% Fed target, investors are anticipating less liquidity and thinking that maybe rates will start going up,” Mr. Chapin said.
Keeping in mind the bond market's tendency to move ahead of the Fed, Mr. Chapin said that the actual tapering, when it begins, “could be a non-event.”
“We're still starting from a point of record-low rates, and it's hard to fathom rates going up anytime soon to the point where it will dramatically hurt corporations,” he said. “If we thought the market was materially overvalued at this point, it might be a reason to sell stocks, but I don't think that's the case.”