No Story Behind Wednesday’s Market Decline—And That’s Not a Bad Thing

There is no clear explanation for Wednesday’s S&P 500 decline, but that’s nothing new. Markets have rallied and sold-off this year without any significant changes in the macro environment, leaving analysts to scramble for drivers of the daily moves. There were any number of reasons given for the day’s 0.65% decline, ranging from turmoil in Ukraine to the release of Federal Reserve minutes and even the potential terror threat from explosives hidden in shoes.

As in recent weeks, disappointing US economic data was brushed off by markets; on Wednesday, it was housing starts. Weather has been cited as the culprit for this year’s disappointing figures, but it’s not clear if this excuse can be used for January’s housing starts. Wednesday’s report showed that housing starts were exceptionally weak in the Midwest, as would be expected, but actually rose in the Northeast.

While markets rose early in the day despite the housing data, they fell steadily following the afternoon release of minutes from January’s FOMC meeting. Yet the overall tone of the minutes largely agreed with Janet Yellen’s House testimony last week and showed a generally upbeat assessment of the US economy. There were some notable details such as “a few” participants indicating that it might be time to raise the federal funds rate relatively soon. This might have unnerved some investors that tightening is imminent, but the likelihood of a rate increase seems very small.

Markets may also have disliked the apparent support to continue the $10 billion taper of the Federal Reserve’s $65 billion monthly bond-buying program. This sentiment was also reinforced earlier in the day by separate comments from three regional Fed presidents who seemed in agreement that the tapering should be complete by Q4 of this year. Notably, the Fed speakers were Dennis Lockhart (Atlanta), James Bullard (St Louis) and John Williams (San Francisco) who are each considered relatively moderate, so their opinion carries some more weight than officials who are outright doves or hawks. Some analysts say a faction of investors that had hoped the Fed would slow the taper finally had their hopes quashed by the day’s slew of Fed commentary, thus explaining the increased selling late in the day.

The FOMC minutes also indicated that officials discussed changing the forward guidance, given that a 6.5% unemployment rate is currently used as the guiding threshold for an interest rate hike, but the actual level is 6.6%. To dispel concerns of an imminent hike, the Fed would seemingly like to engineer a new method of communicating a rough timeline for its next rate move. While the issue was discussed at the FOMC meeting, there was no agreement on what metrics should be used. Regardless, it is unlikely that the market was overly influenced by this.

It is difficult to discern the market reaction to the worsening political events in Ukraine, Thailand and Venezuela.  Clashes between Ukrainian security forces and thousands of protesters drew condemnation from President Obama Wednesday afternoon and there are fears that the unrest may spread beyond Kiev. In Thailand, anti-government protesters surrounded Prime Minister Yingluck Shinawatra’s temporary office in Bangkok to demand her resignation. And in Venezuela the opposition leader was due in court to face charges of fomenting unrest as thousands took to the streets to demand the resignation of President Nicolás Maduro.

It is only a few weeks ago that an emerging market “crisis” was supposedly looming, even though there was no apparent deterioration in fundamentals at the time of the late-January/early-February market selloff. Yet now social unrest is worsening in several countries and there is seemingly little response from US markets; the muted nature of Wednesday’s decline dismisses the notion of panic. This is actually a positive sign as it indicates that the emerging market “crisis” talk earlier this year was purely driven by general sentiment and not an actual expectation of a meltdown reminiscent of the late 1990s.

Also, it hopefully shows that investors now recognize that “emerging markets” are not a single entity. Half the global economy is made up of emerging economies with separate political issues and idiosyncratic financial fundamentals.

Ultimately, Wednesday was a day in which markets moved lower because investors needed more inspiration before moving the indices to new highs. The investment world doesn’t have to change for markets to have a down day.

This article also appears on Ronan Keenan’s MacroWatcher blog