What’s fueling the recent volatility in U.S. markets?

Executive summary:

  • U.S. markets are gyrating on stronger-than-expected economic readings
  • Good news for the U.S. economy is being treated as bad news by markets
  • The Fed could pause its tightening cycle this year

On the latest edition of Market Week in Review, Director of Client Investment Strategies, Mark Eibel, and Investment Strategy Analyst BeiChen Lin discussed recent market volatility, key economic and earnings data and minutes from the U.S. Federal Reserve (Fed)’s Jan. 31-Feb. 1 meeting.

Is a good news-is-bad-news narrative driving markets?

Lin and Eibel started the conversation by examining the factors behind recent swings in U.S. markets, including a roughly 700-point drop in the Dow Jones Industrial Average on Feb. 21 and marked intraday volatility on Feb. 23. “I think this is one of the most nuanced markets I’ve ever seen in my career,” Eibel stated, adding that U.S. markets generally seem to be in a phase where what’s good news for Main Street constitutes bad news for Wall Street.

He said that a classic example of this good news-is-bad-news narrative occurred Feb. 21, when S&P Global’s services PMI (purchasing managers’ index) for the U.S. unexpectedly rose into expansion territory. While this was good news for the health of the nation’s economy, it was treated as bad news by markets due to fears that it could cause the Fed to hold rates higher for longer as it attempts to corral inflation, Eibel explained.

He noted that this theme, which played out during much of 2022, could also emerge as the prevailing narrative for markets in 2023. “Sometimes, it might be a case where good economic news is bad news for markets, and other times, it might be a case where bad economic news is good news for markets, but any data points related to inflation or the Fed are likely going to grab investors’ attention. The real challenge is figuring out what the market is really latching on to—whether on a day-to-day basis or even within the same day,” Eibel remarked.

U.S. labor market remains robust as jobless claims tick lower

Zooming in on recent U.S. earnings and economic data, Eibel noted that better-than-expected fourth-quarter earnings results from chipmaker Nvidia helped power the Nasdaq Composite Index higher on Feb. 23. Meanwhile, on the economic front, U.S. initial unemployment claims for the week ending Feb. 18 fell by roughly 3,000, he said, while GDP (gross domestic product) for the fourth quarter was revised slightly lower, from 2.9% to 2.7%.

“2.7% growth is still a pretty strong number—but looking deeper into the data, it does appear that consumer spending started to slow down a bit as the quarter progressed,” Eibel noted.

He said that these three data points, which were all released Feb. 23, were each interpreted differently by the market at varying times throughout the day. “This is readily apparent by looking at the movements in the S&P 500® Index on Feb. 23, with markets initially rising, then falling, then rising back up again,” he stated, emphasizing that investors are seeing mixed signals in the data.

Is a pause in the Fed’s tightening cycle coming this year?

Lin and Eibel wrapped up the segment with a look at how minutes from the Fed’s latest policy meeting impacted markets the week of Feb. 20. Eibel said that there was a high level of interest in the Fed minutes this time around, because investors were hoping they would shed more light on what conditions it might take for the central bank to pause its rate-hiking campaign.

“It turned out that the Fed minutes didn’t reveal anything more on this end, so there wasn’t much impact on markets,” he stated. However, the general consensus is that the Fed will probably raise rates by 25 basis points (bps) at its mid-March meeting, Eibel said, with perhaps a few more 25-bps rate hikes later in the spring.

While it’s easy to get hung up on how many more rate increases could be in store over the next few months, Eibel stressed that it’s important to take a step back and realize that the end-point in the Fed’s tightening cycle is probably nearing. He added that in his opinion, this so-called Fed pause could last for longer than anticipated, due to stubbornly high inflation.

Circling back to the volatility in U.S. markets, Eibel said that he expects markets to be on the choppy side this year. “Even though they’ve gotten off to a good start in 2023, things haven’t felt very comfortable on a day-to-day-basis—and this may continue for some time,” he remarked. Ultimately, from his vantage point, the best way for investors to weather the choppiness is to remain diversified in their portfolios and stay in the game, Eibel concluded.

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