A Market Tale Full of Sound and Fury Signifying Nothing
It was an extremely busy day with 8 major events, but there was only a muted market reaction.
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Tuesday’s market action reminds me of a line from Shakespeare’s Macbeth: “Life is a tale told by an idiot, full of sound and fury, signifying nothing.” We had plenty of sound and fury, especially around the inflation issue, but very little of it provided any real insight into what comes next for market participants.
Consider the list of events that hit on Tuesday:
1. IBM (IBM) opened with poor guidance and blamed a shift in client spending toward memory and servers ahead of price increases. The stock was hit hard and was the first real landmine of earnings season.
2. The banks kicked off second-quarter earnings with mixed reactions. Bank of America (BAC), JPMorgan Chase (JPM) and Goldman Sachs (GS) drew positive responses while Wells Fargo (WFC) and Citigroup (C) disappointed.
3. There were fresh hostilities with Iran, with a third night of U.S. strikes and Iranian attacks on tankers in the Strait of Hormuz.
4. Oil pushed higher again, extending a move that has been the sharpest since 2020, keeping the inflation worry front and center.
5. Trump reversed his 20% Hormuz reimbursement fee just a day after announcing it, replacing it with trade and investment deals from the Gulf States and declaring the strait open to all traffic except Iran.
6. The June CPI came in surprisingly soft, though the reading was distorted to some extent by energy prices that have since reversed sharply higher.
7. Kevin Warsh gave his first congressional testimony as Fed Chair, sounding confident and competent without tipping his hand on what policy is actually coming.
8. New York Governor Hochul signed an executive order pausing large data center construction for up to a year, making New York the first state to hit the brakes on the AI infrastructure buildout.
That is a heavy news day but the market response was surprisingly mellow. We ended with mild gains, breadth just slightly better than even, and more new 12-month lows than new highs for the second day running.
Warsh Sounded Good but Said Little
Warsh’s testimony was the most anticipated event and it delivered the least in terms of actionable insight. He came across as confident and competent. He made the case that the Fed must take responsibility for inflation and has the tools to deliver price stability. What he did not do was tip his hand on what policy is actually coming.
Warsh has made it clear that he will communicate less than his predecessors and be less likely to “jawbone” policy. His first testimony sounded authoritative without committing to a path keeps his options open. For traders trying to handicap possible hikes at the July and October meetings, it left the picture murky and bonds barely moved.
The CPI Relief May Not Last
The soft CPI was the reason the market held up. A cooler inflation reading takes some pressure off the rate-hike narrative that drove Monday’s ugly action. The problem is that the June data does not capture the recent energy spike. Oil surged the most since 2020 over the past several days, and the Hormuz situation is still live even with the fee reversal. There was some softer non-energy numbers but the next CPI will tell a different story if oil stays elevated.
So the relief Tuesday rests on a backward-looking number while the forward-looking pressure is still ramping higher. That is why the gains were mild and the internals stayed weak. The market is not convinced the inflation problem has suddenly passed due to one friendly CPI report.
Strategy
Days like Tuesday are why I continue to hold high cash levels in client accounts. There was enormous news flow, sharp intraday swings, and almost nothing resolved. Trading aggressively in this kind of session is a good way to get chopped up.
The internal action remains the primary focus. Breadth barely positive and more new lows than new highs, with the indexes sitting near their highs, says the average stock is still under pressure even on an up day. Some rotation action is holding the indexes up while the majority of names struggle. That is not the profile of a market ready to trend higher.
I am staying patient. Second-quarter earnings are just getting started and IBM showed Tuesday morning that the reports can produce landmines. The setups I want will come out of the earnings dislocations over the next few weeks, not out of a chaotic session that signified nothing. Cash gives me the flexibility to take a long hike in the woods while waiting for developments.
Have a good evening. I’ll see you Wednesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
