Inflation Becomes an Annoyance for the Market
Wall Street was looking for a convenient excuse for some profit-taking — and now they've found it. But the most troubling action was in another area.
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On Wednesday morning, it was reported that the Consumer Price Index (CPI) rose 0.2% in October with an annualized rate of 2.6%. This was roughly in line with economists’ consensus expectations. The hot spot is Owners’ Equivalent Rent (shelter costs), which jumped to 0.4% in October from 0.2% in September and accounted for approximately half of the CPI increase.
Market participants were initially relieved with the in-line report, but as the day progressed, there seemed to be greater recognition of the fact that inflation is staying stubbornly high and is still above the Fed’s target of 2%.
The market might have shrugged it off in a different context, but stocks have been on a rampage lately and looking for a convenient excuse for some profit-taking. The profit-taking picked up as the day progressed. The primary victims were the stocks that have jumped the most since the election. The Magnificent Seven MAGS held up better, while the Russell 2000 IWM gave back 0.85% on breadth of 3,700 losers to 5,700 decliners.
The most troubling action was in bonds. The 20+ Year Treasury Bond fell sharply and closed at its lowest point since late May. The odds of a quarter-point cut in December are still more than 80%, but the chances of additional cuts next year are falling fast. The Fed is still primarily focused on the jobs market and isn’t too concerned about inflation at this point, but that could change quickly if the economic news stays hot.
The good news is that the market needed some corrective action and consolidation in order to form a better foundation for more upside. The bears are hoping for a total and complete collapse, but that is very unlikely to occur after a move of this strength and magnitude. It would take some very dramatic negative news to shift the market trend right now.
I remain optimistic about favorable stock picking in the weeks ahead, and some soft action will now make our job of finding new entry points a little easier.
What is driving this market has been a Goldilocks economic narrative on steroids that was triggered by the Red Wave election. There is still extreme optimism about growth and little worry about inflation, but the inflation issue is causing a little annoyance now.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
