Good morning. Stocks tanked in the last half-hour on Thursday and while the major news outlets attributed the decline to either profit taking or some trepidation in front of this morning's big Jobs report, we'd like to offer a little more substantial reason for the 85 point dive on an otherwise subdued day of trading.
Although volume was thin and a sell program or two was undoubtedly involved, what prompted our search for a better reason than the "just because" that was being bandied about, was the fact that up until 4:00 pm eastern Thursday, the market had been brushing aside any and all bad news this week. But then all of a sudden with 30 minutes left in the session – wham, the game changed.
For example, when the ISM Non-Manufacturing report was released showing the services sector of the economy actually contracted during November, the market reaction was something on the order of "no worries, we'll get ‘em next month." And then when it became clear that the combination of Black Friday and Cyber Monday couldn't save the nation's retailers from weak results in November, traders simply ignored the relatively punk state of the shopping season.
And the ‘all news is good news' theme wasn't limited to Thursday as traders had definitely been able to look on the bright side after ADP reported that the private sector lost a lot more jobs last month than had been expected. So we wanted to know why stocks suddenly decided to turn tail and run into the close yesterday afternoon.
After digging around a bit, we found a report on WSJ.com that, at least from where we sit, seems to explain the late-day dive. According to the report, in an afternoon meeting with Dow Jones editors and reporters, St. Louis Fed President James Bullard suggested that weak job growth shouldn't necessarily keep the Fed from raising interest rates. Bullard said, "If a tepid recovery in labor markets is just the new reality ... then you shouldn't be saying, 'oh, we are just going to keep interest rates where they are.'"
While this may sound like an inflation hawk simply ‘talking his book,' the key point here is this was the second time this week we've heard a Fed official talking about raising interest rates before the economy has returned to health. Recall that on Tuesday, it was Philadelphia Fed President Charles Plosser who said "Increases in interest rates may be appropriate before unemployment or other measures of resource slack have diminished to acceptable levels."
If the two statements from the Fed officials sound familiar, first give yourself a gold star and then second, recognize that the Bernanke Fed usually does a pretty good job of communicating its intentions. So, while Bullard and Plosser may just be talking up the Fed as an inflation fighter, they just might also be laying the groundwork for the Fed removing excess policy accommodation much sooner than the market expects.