Markets: No News Is Good News

Any new data, it seems, can depress stock markets these days.

widemodern_markets_081513.jpg

A pair of specialists work on the floor of the New York Stock Exchange Thursday, Aug. 15, 2013. Warnings of weaker sales from two major companies and concerns about the Federal Reserve sent the stock market spiraling Thursday.

By SHARE

Thursday provided an illustration of the confusion that rules U.S. financial markets as so-called tapering by the Federal Reserve approaches. Good job numbers and bad figures from retail giant Walmart both helped to weigh down stocks, pulling the Dow Jones Industrial Average down nearly 225 points. Treasuries also saw the effects, with the yield on the 10-year treasury jumping to its highest level since 2011.

[READ: U.S. Posts Lowest Jobless Claims Since 2007]

In other words, good news is bad news, and bad news is also bad news.

It's not that market participants are losing their minds; in fact, it may be that they're finally seeing the light as the Fed gets ready to back off of its $85 billion per month stimulus plan known as QE3.

"What the market was thinking prior to a couple of months ago was the Fed had its back and was going to continue stimulus indefinitely." says Brad MacMillan, chief investment officer at Commonwealth Financial Network. "The fact that we are being forced to look at what companies really can make and what money really costs can only be healthy in the long run as we move towards a normal economy,"

New jobless claim numbers released Thursday beat expectations, which many analysts took as a sign that the economy is getting strong enough to warrant the Fed tapering its monthly asset purchases when it meets in September.

"Now people are saying, 'Oh, this means the Fed is definitely going to start pulling back its purchases in September. The August employment report is likely to be good, so this brings Fed tightening closer.' So they kind of spook themselves," says Gus Faucher, senior economist at the PNC Financial Services Group.

However, Walmart also posted earnings numbers before the opening bell that missed expectations, with same-store sales falling 0.3 percent. And tech bellwether Cisco announced a large round of layoffs after Wednesday's market close, which also fed into the fear factor.

[ALSO: Walmart Cuts Profit Outlook on Shopper Worries]

In addition, inflation numbers provided some uncertainty. Figures out Thursday showed the CPI to be up 2 percent from one year ago. That's the highest growth seen since February but also leaves room for the Fed to continue its loose money policies – the central bank's open market committee has said that 2.5 percent inflation is one of its thresholds for considering when to raise interest rates.

Though it's just a handful of economic indicators, they explain a lot about the markets' complicated relationship with Fed Chairman Ben Bernanke and his central bank compatriots. Walmart's earnings carry extra weight because they come from the nation's largest retailer. When the giant corporation lowers its sales projections, it recasts how investors look at other stocks.

"The fact that even as the economy continues to improve, Walmart's not looking to be able to improve its earnings, says that companies as a whole are going to have a difficult time growing their earnings," says MacMillan.

The harsh reality that markets may be coming to is that as QE3 slowly eases away from propping up stocks, an improving economy isn't necessarily going to boost companies' fortunes enough to maintain recent trends in stock price growth.

[MORE: Fed President Says Lower Unemployment Could Mean Taper]

Market reactions matter for more than people's 401(k)s and stock investments; as investors move back into treasuries and boost those rates, for example, it means rising mortgage rates, which could weigh on the housing market.

This isn't the first time that markets have spooked on talk of tapering. When in June Bernanke first signaled that the Fed might start tapering in 2013, the stock market plummeted and bond yields spiked. If the Fed does dial back its purchases in September, says Faucher, central bank leaders will likely work to calm markets. However, in the long run, stocks will have to adjust to more closely following business and economic fortunes and less closely watching the Fed's hand on the throttle.