3 Inflation Drivers Are Making the Market Weaker Than it Looks

Monday was one of those days that was much worse than it looked. The S&P 500 and the Russell 2000 were down less than 1% but the Nasdaq 100 was clipped for nearly 2% and growth stocks were hit hard. The IBD 50 ETF (FFTY) was down 2.5% and only six of the 50 names had gains. Breadth finished around 40% positive.

There was a lot of poor action and the culprit was inflation and interest rates. What made Monday different is that the inflation worry stopped being a vague, background theme and became three concrete events.

The 3 Catalysts

The first problem was the proposed Hormuz fee. President Trump announced the U.S. will impose a 20% fee on all cargo shipped through the Strait of Hormuz and will reinstate the blockade of Iranian ports. Twenty percent of the world’s oil normally moves through that strait, so a 20% charge on that flow is a direct tax on one-fifth of global oil. Crude jumped on the news and finished up more than 8%.

The second problem came from inside the Fed. Governor Christopher Waller said in a speech on Monday morning that inflation has expanded beyond the usual drivers like energy and tariffs, and he named artificial intelligence as a root cause for why prices have stayed stubbornly above the 2% target. When the Fed itself sees AI spending as a lasting inflation driver, the pressure to hike rates will increase.

The third issue was in the bond market. The Wall Street Journal reported that the tech giants are borrowing even more than expected to fund the AI buildout, and that flood of new bond supply is weighing on prices and pushing yields higher. The AI capex story is now pressuring rates directly, not just through the inflation channel.

The inflation issue has been lurking for quite a while and Monday it solidified. That is why we had such ugly action.

Weaker Than the Indexes Showed

The headline index numbers understated the damage. The growth names took the real hit. When yields rise, the high PE stuff tends to be sold first, and the high-growth names are the highest PE in the market. That is why the Nasdaq 100 and the IBD 50 were down far more than the S&P.

The selling accelerated late in the day which is always a concerning pattern. The two hot recent offerings both broke down, with SpaceX (SPCX) and SK Hynix (SKHY) getting hit hard. Apple (AAPL) reversed after breaking out to a new all-time high earlier in the day, which is a poor sign because it was the one name holding up and it could not keep its gain. When the last hiding place fails to hold a breakout, we have issues.

The most notable number of the day was under the surface. There were 161 stocks hitting new 12-month lows against only 125 new highs. That is uncommon with the indices sitting this close to their highs, and it tells you the average stock is much weaker than the index level suggests.

Strategy

My high cash levels and defensive posture are built for exactly this kind of setup where there are pullbacks in many solid stocks simply due to market conditions.

Kevin Warsh testifies before Congress and the June CPI will hit on Tuesday morning. Bank earnings reports follow. Inflation will continue to be a focus and it won’t take much for those worries to continue.

Later in the week, Trump has announced, a prime-time address to the nation will take place on Thursday evening without a specified topic, which adds another layer of uncertainty.

I am not making big moves ahead of all that. I am protecting gains, holding cash and watching the names on my buy list for the pullbacks that earnings season will create. The biotech group took its second day of pressure and I expect it to find support and consolidate but I’m not rushing to call a low.

Days like today are why the cash cushion exists. Tuesday tells us whether this was just a one-day inflation scare or the start of something with more room to run.

Have a good evening. I’ll see you tomorrow.

At the time of publication, DePorre had no positions in any securities mentioned.