Morning Joe Charts: Too Much Good News Behind the Correction?

On MSNBC’s Morning Joe today, Steven Rattner presented charts to explain some key culprits behind the stock markets’ recent decline.

The stock market suffered its biggest drop yesterday since August 2011, a fall of more than 4%, bringing the total decline to nearly 8% from the peak.  As always with financial markets, the reasons are hard to assess – even retrospectively – but at least one of the culprits appears to be (ironically) too much good news.

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For starters, the market has been on an almost straight up tear since bottoming out amidst the financial crisis, in March 2009. At its peak in late January, the market was nearly double its level just five years ago. Last year alone, the broad S&P index was up more than 20%. In that context, some sort of correction – perhaps not as violent as what we have been experiencing – was inevitable. Finally, yesterday’s fall felt particularly large because fluctuations in share prices have been unusually small in recent months. For the stock market, it has been like the first week of winter after a balmy summer.

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Paradoxically, one of the triggering events for the drops on Friday and yesterday was the positive jobs report, released before the market opened on Friday. While the changes in employment were broadly what was expected, wages rose by a surprisingly large amount – up 2.9% compared to the same month a year earlier. That might seem like good news, particularly given how anemic wage growth has been during the economic recovery.

But faster wage growth suggests the possibility of increasing inflation, which is scary to the market because it implies the possibility of more rate hikes by the Federal Reserve. Higher interest rates are the enemy of a rising stock market.

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Indeed, the Treasury market has been signaling the possibility of higher interest rates since early this year. The benchmark 10-year rate has risen from about 2.4% to as high as 2.85%, a remarkably large increase in such a short period of time. Meanwhile, traders now anticipate at least 3, and possibly 4, rate increases by the Fed during 2018.

Higher rates are problematic for the stock market because they give investors another place to put their money (money market funds, bonds and the like) and earn higher returns.

Yesterday, Treasury rates fell back to 2.7%, raising the question of how much of a role rates will continue to play in the performance of the equity markets.