Well, that was confusing. There were no news items that dropped the markets in the last 45 minutes of trading. Instead, traders seemed to talk themselves into a belief that the Fed was going to be more hawkish than its own statement seemed to indicate.
Stocks were modestly higher all day until the minutes from the Federal Reserve's January meeting came out at 2 p.m. ET. Traders liked what they heard: The Fed said there were few signs of a broad-based increase in wage growth.
Traders have been worried that inflation is picking up, and that higher rates would kill the rally, so the Fed saying it's not too worried was greeted as a positive sign, and bond yields initially dropped.
But then it all turned. Bond yields, which move opposite price, moved back up from about 2.91 percent on the 10-year to over 2.95 percent. And predictably, the stock market's rally fizzled.
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 sank below the lows set earlier in the day.