If there's one thing that can be said about this market, it's that anything can happen in the last hour of trading. Today was a case in point. After spending most of the day in positive territory, and picking up steam after the Federal Reserve released the minutes from the last meeting of the Federal Open Market Committee, things got ugly.
After being up over 300 points, the Dow Jones Industrial Average ($DJI) finished down 167. The CBOE Volatility Index (VIX), which began the day around 20—well below the recent highs of 50.3 on February 6, in the heat of the recent meltdown but still elevated from last year— fell to below 17, a roughly 15% move downward, before finishing the day back above 20. See figure 1 below.
So, what might have caused the gyrations? Today's existing home sales number came in a little light at a seasonally-adjusted 5.38 million, a drop of 3.2%. And some sectors that saw gains yesterday, such as chipmakers, pulled back a bit. Shares of Walmart (WMT), which fell some 10% yesterday after its earnings release, continued their slide.
But the Fed minutes, and perceptions thereof, seem to have led the way. Perhaps many were expecting a bit more "dovish" talk from the Fed. Recall at its January meeting, rates were left unchanged, but many interpreted the statement as a veiled warning about inflation. In today's release, the central bank signaled "further" gradual increases in the Fed funds rate later this year and warned of "upside risks" to economic growth. Recall it had previously forecast 3 quarter-point hikes for 2018.
"Further" doesn't necessarily mean "faster," which could mean the Fed, under new chair Jerome Powell, could extend these rate hikes into 2019.
And remember, since the January FOMC meeting, several pieces of data have come out, namely a monthly jobs report that showed not only robust job growth, but also a rise in hourly earnings. And then there's last week's stronger-than-expected CPI number. Plus, Congress and the president agreed to a new budget deal that hikes spending, and the president also released plans for a massive upgrade to the nation's infrastructure.
Meanwhile, the yield on 10-year Treasurys rose to a 4-year high above 2.95%.
So it seems the market may be pricing in a bit of inflation. It's important to remember, though, that inflation has been muted for a number of years, and remains low in the U.S. and other developed economies.
The fundamentals driving the economy have not changed materially in recent weeks, even if perceptions have. But most analysts are not forecasting a recession in the near future. And the spread between 2-year and 10-year Treasurys— seen by many as a recession warning sign— has tightened a bit but has stabilized lately at around 0.65%.
The bottom line for traders and investors, though, is that the wild ride may be far from over. Stay tuned.
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