Here’s how traders talked themselves into a sell-off


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Olivier Douliery | Bloomberg | Getty Images

Jerome Powell, governor of the U.S. Federal Reserve and President Donald Trump’s nominee as chairman of the Federal Reserve, arrives to a nomination announcement in the Rose Garden of the White House in Washington, D.C., on Thursday, Nov. 2, 2017.

What happened? It was widely noted right after the Fed minutes came out that this meeting occurred before the January jobs and wage report came out, which both were stronger than expected. The meeting also occurred before President Trump signed a new budget that contained a significant increase in deficit spending.

The bottom line is this: After thinking about it, most traders seemed to agree that if the Fed meeting had been held now, with all the information that’s come out since the January meeting, the central bank would sound more hawkish than it did back then.

That’s how fast all this is changing.

In theory, gradually higher rates should not derail the rally, a point made by J. P. Morgan in a note to clients on Wednesday. “While rising long-term rates will ultimately become a negative for profits and multiples, we do not see current levels as a reason to de-risk and sell equities,” wrote Dubravko Lakos-Bujas, the bank’s head of U.S. Equity Strategy.

He noted that the recent rise in rates corresponds to stronger economic growth, positive earnings revisions, tax reform, and higher government spending, all of which are positive for equities.

But traders are clearly not interested in theories. While the selloff Wednesday occurred on lighter volume than recent activity, the market decline accelerated after 3 p.m., when the S&P sank below the lows set earlier in the day.

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