The Real Reason for the Rebound

February 24th Weekly Market Update

The first market storm of 2014 (that we had named Angel) is over with the S&P 500 and broader Russell 3000 stock market indexes rebounding to all-time highs after reversing a 6% decline.

The decline was sparked by turmoil in emerging markets (EM) and weak economic data here in the United States in what amounted to a “growth scare.” Stocks have rebounded even though conditions in EM, measured by bond yields and credit default swaps, have not improved much, and the U.S. economic data continue to disappoint economists’ expectations [Figure 1]. Also, the Federal Reserve has communicated no change in path or message as a result of these developments. So what turned stocks around from their intraday low point on February 5? It was most likely fading concerns over weaker growth and deteriorating conditions for EM.

But another potential driver of the turnaround is the prospect for a change to a more business-friendly political environment. On February 6, just one day ahead of the debt ceiling deadline — and the need for the Treasury to shift to extraordinary measures to continue to meet the United States’ obligations — a leak emerged that House Republicans were dropping their demands over lifting the debt ceiling. They had been considering linking an increase to the debt ceiling to the Affordable Care Act (ACA) or the Keystone XL pipeline, among other ideas. On the news, stocks posted a 1.3% gain. Another 1% gain came on Tuesday, February 11, as the House Republicans’ shift to a “clean” debt ceiling bill was publically announced.

For the full article: The Real Reason for the Rebound