Goldilocks Is Back in Town — But the Story Has a Changed
Buyers are getting busy and they've crafted a new bullish economic theme.
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The market was surprised Wednesday morning when core CPI came in slightly higher than expected. It wasn't a significant miss, but the market anticipated another soft number and a greater likelihood of a half-point interest rate cut next week at the Fed meeting.
Stocks sold off as bond yields moved higher, and the odds of a 0.5% cut dropped to around 13% from 34% on Tuesday. The selling was aggressive enough to take the S&P 500 down to the closing low that was hit on Friday, but when support held, the buyers got busy and crafted a new bullish economic theme.
The theme is that a quarter-point cut is better than a half-point cut because it means the economy is still fairly strong, and there is a greater likelihood of a soft landing. It also means that the Fed is not behind the curve and still can engineer an economic transition without causing a recession. In other words, Goldilocks' economic scenario is back.
The bears' spin is that the hotter-than-expected CPI raises the risk of stagflation. Just because CPI was still elevated doesn't mean that the economy isn't slowing. There aren't any overt signs of an economic slowing, but there is some anecdotal evidence that gives the bears hope.
The intraday reversal was quite impressive, with breadth going from more than 2 to 1 negative in the morning to about 5,400 gainers and 4,000 decliners by the close. Magnificent Seven names were leaders again, and Nvidia NVDA returned to its former glory with a gain of around 7.5%.
The S&P 500 finished the day back over its 50-day simple moving average and now has better technical conditions for a continued bounce. There is a PPI report Thursday morning, but there isn't much news until the Fed's interest rate decision next week. The potential for positive anticipation of a quarter-point hike looks like a decent bet at this point.
The action Wednesday helped the charts, so I'll be looking harder to put more cash to work, but it continues to be a tricky environment, and we can't overlook the problem of seasonality for another few weeks.
Have a good evening. I'll see you Thursday.
At the time of publication, Rev Shark was long NVDA.
