January 17, 2025
Good morning,
Under the heading, change can be refreshing. Morning Notes will be sent on Mondays and Fridays going forward —the week ahead on Mondays and deciphering the week’s market message on Fridays.
With Futures up .5% premarket this morning, this week is shaping to be the strongest week for the major equity indices since the election. There are several reasons: better-than-expected inflation data and a commensurate decline in yields in the bond market, a much better-than-expected start to the earnings season with blowout numbers from the major money center banks, and the end of the new administration’s policy uncertainty period. Enthusiasm abounds.
Following several weeks of correction in equities, worse than that in bonds, markets were oversold entering the week. A spike in daily volatility around macroeconomic events (employment, CPI, PCE data days mostly) should be noted and dampen the impact of these big daily moves up and down. However, Wednesday’s CPI surprise against the backdrop of an almost record oversold bond market, and you have the recipe for a short squeeze. It has been most of the fuel for this week’s rally. And not a minute too soon.
As mentioned previously, the late December/early January selloff damaged the bullish market message. We were still giving the bull the benefit of the doubt but with much less conviction. This week’s CPI and PPI reports were steps in the right direction for relieving recent inflation fears. The reversal in bond yields is key to the stock market’s rebound. Market signals are still teetering on the knife’s edge toward bullish, but we’ll need a sustained rally beyond the few days this week (accentuated by short covering) to prevent a downgrade in overall equity weightings in portfolios – aka getting defensive.
Volatility will not get a break next week, with DJT apparently identifying 100+ executive orders to announce as soon as he returns to the White House. See you Tuesday. I hope you enjoy the long weekend.
Be well,
Mike
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