November 16, 2024
Good morning,
Tuesday’s CPI report came in slightly lower than expected. However, judging solely by the market reaction in stocks and bonds, you would not be blamed for assuming the inflation report was one of the most dovish surprises in years. The S&P 500 Index jumped +1.9% for the best day in six months, the Russell 2000 (small caps) soared +5.4% for the best day in over a year, and the 10yr Treasury yield plunged 20 basis points for its biggest drop since March.
There are two likely reasons for these outsized moves. First, with hedge funds short stocks and bonds, according to the most recent positions report, short covering played some role. Second, investors have been wrestling with whether the Fed can pull off a soft landing. The CPI report makes that struggle easier. It supports the case that the tightening cycle is over and that the higher-for-longer mantra may not be as long as previously feared.
Retail sales for October were reported yesterday and declined for the first time since March. Consumers cut back on discretionary purchases. Walmart is out this morning reporting solid earnings numbers (backward looking) but warned that they are less confident in their consumer than they were only a few months ago. They cut forward earnings estimates, and the stock is off -5% in pre-market trading this morning.
It is hard for me to rationalize durable exuberance for stocks over a soft-landing narrative. Soft landing is still negative economic growth, just not as negative as a hard landing recession. The S&P 500 is up +18% so far this year. The 7-AI mega-cap stocks still account for over 90% of that. The other 493 stocks in the S&P are now flat for the year.
Be well,
Mike
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