Cooler Inflation Means Good Times Lie Ahead?

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On Thursday, Sarah Min and Alex Harring of CNBC reported the Dow pops 1,200 points, S&P 500 jumps 5% in biggest rally in two years after light inflation report:

Stocks mounted their biggest rally since 2020 after October’s reading of consumer prices raised investor hopes that inflation has peaked.

The Dow Jones Industrial Average jumped 1,201.43 points, or 3.7%, to 33,715.37 for its biggest one-day gain since stocks were emerging from the depths of the pandemic bear market. The S&P 500 jumped 5.54% to 3,956.37 in its biggest rally since April 2020. The Nasdaq Composite surged 7.35%, its best since March 2020, closing at 11,114.15.

October’s consumer price index rose just 0.4% for the month and 7.7% from a year ago, its lowest annual increase since January and a slowdown from the 8.2% annual pace in the prior month. Economists were expecting increases of 0.6% and 7.9%, according to Dow Jones. Excluding volatile food and energy costs, so-called core CPI increased 0.3% for the month and 6.3% on an annual basis, also less than expected.

Treasury yields plunged after the CPI report, with the 10-year Treasury yield falling roughly 30 basis points to 3.81% as traders bet the Federal Reserve would slow its aggressive tightening campaign that’s weighed on markets all year. The yield on the 2-year Treasury dropped about 30 basis points to 4.32% (1 basis point equals 0.01%). The U.S. dollar, another recent pressure point for stocks, tumbled to its worst day since 2009 versus a basket of other currencies.

“Interest rates are still running everything in markets,” said Exencial Wealth’s Tim Courtney. “With today’s CPI number coming down, the market is now betting pretty clearly that they think the interest rate [rises] are coming close to an end. So, you see those interest rate sensitive stocks doing really, really well.”

Tech stocks that have been hardest hit by the rise in inflation and surging interest rates led the gains Thursday. Shares of Amazon were up about 12.2%. Apple and Microsoft each advanced more than 8%. Shares of Meta rallied more than 10%. Teslajumped 7%.

Semiconductor stocks got a boost too, with shares of Lam Research gaining 12% and Applied Materials rising more than 11%. KLA popped 9%.

Thursday’s advance rekindled the comeback rally that began in mid-October but stalled in recent weeks. The Dow touched its highest since August on Thursday and the S&P 500 rose above the 3,900 threshold, which has been a key resistance level for the market.

Today, Sarah Min and Tanaya Macheel of CNBC report the Nasdaq adds 1.9%, S&P 500 closes nearly 1% higher and notches best week since June

The S&P 500 rose on Friday and headed toward its best week since June as a report showing slowing inflation on Thursday raised hopes that the Federal Reserve would soon slow its tightening campaign.

The S&P 500 added 1.1%, bringing its gain for the week to more than 5%, its best week since the one ended June 24 of this year. The Nasdaq Composite added 2.1% as investors continued to buy tech shares on hopes interest rates would ease. The Dow Jones Industrial average gained 0.2%.

The Dow jumped more than 1,200 points on Thursday following a smaller-than-expected rise in consumer prices for the month of October, giving investors hope that inflation may be cooling. The S&P rose 5.5%, and the Nasdaq Composite surged about 7.4%. It was the best day since 2020 for all three.

Treasury yields plunged Thursday on the back of the weaker-than-expected inflation print. The 10-year Treasury yield was at 3.82% after ending last week at 4.16%.

“From an equity market perspective, as long as the threat of much higher rates is out the way, this should remove a major headwind,” Barclays’ Emmanuel Cau wrote in a Friday note.

Tech stocks on Friday shook off a decline in cryptocurrencies, which came under pressure Friday after FTX announced it’s filing for bankruptcy, and CEO Sam Bankman-Fried resigned. Bitcoin fell 6%, and ether declined more than 7%. Tech stocks and related crypto stocks rebounded after opening lower Friday.

Casino stocks jumped after China said it would lift some Covid restrictions, shortening quarantine time for international travelers by two days. Shares of Wynn Resorts and Las Vegas Sands were more than 8% and 6% higher, respectively.

All of the indexes are on pace for a winning week. The Dow is up about 4% on a weekly basis, while the Nasdaq Composite is up nearly 8%. This week is a resumption of a comeback rally for the bear market which began in mid-October, but paused in recent weeks. The S&P 500 is now up nearly 14% from its bear market low, but still down 16% for the year.

“Yesterday’s strength was notable, it was remarkable, it was historically significant, but it’s one day. It’s a single day. And we can’t read too much into that when we are still in a volatile period within a downtrend and challenging macro environment,” said U.S. Bank Wealth Management’s Bill Merz.

And Lu Wang of Bloomberg reports day traders sold stocks at a record pace during inflation-fueled rally:

As US stocks surged to the best day in two years, one of the market’s most reliable group of buyers was nowhere to be found.

Day traders dumped equities in droves, selling a net $2.65 billion in shares as the S&P 500 jumped more than 5%. The disposal was the most since JPMorgan Chase & Co. began tracking the flows five years ago based on public data on exchanges. The group also went bearish in the derivatives market via moves like buying put options, a tilt that prompted market makers to sell $1.6 billion of shares to avoid directional risk.

The exodus marked an about-face for retail traders who had been burned all year long trying to time the bear-market bottom. Missing out on the latest rally added to their pain. By JPMogan’s estimate, small-fry traders have seen 41% of their money wiped out since January -- a loss that is more than double the S&P 500’s. For bulls, the latest failure was a sign that a key pillar of excess that had built during the easy-money post-pandemic era had finally been toppled.

“When it comes to retail capitulation, this data point should put any doubt to bed,” JPMorgan strategist Peng Cheng said in an interview.

Retail was bailing on stocks just as a cooler-than-expected inflation print touched off a rally for the ages. Institutional investors who had cut equity exposure to the bone or taken outright bearish positions on stocks likely drove the best advance since April 2020. Indeed, short sellers were among those forced to fold as the rally picked up steam during the day. A Goldman Sachs Group Inc. basket of the most-shorted stocks surged 11% Thursday.

History suggests small investors who missed the rally may not want to chase it now. Since 2006, the S&P 500 has scored 5% gains during 14 other sessions. Among them, nine saw negative returns one week later, with the index falling an average 2.6%, according to data compiled by Wells Fargo Securities LLC.

Thursday’s massive rally underscores the peril of investing during an entrenched drawdown like the one that’s gripped US equities all year. Sharp reversals have been the defining trait, with outsize reactions to readily shifting data and narratives. Driven by fears over a recession as the Federal Reserve embarked on the most aggressive inflation-fighting campaign in decades, professional money managers have spent all year cutting equity exposure and raising cash.

As much as that defensive posture is still in place, it could succumb to another rally should the S&P 500 move back above its average price for the past 200 days, according to Mike Wilson, chief US equity strategist at Morgan Stanley. The trendline, which put an end to the equity rebound during the summer, now sits near 4,080. The index added 0.3% to 3,968.20 as of 12:30 p.m. in New York.

A breakout at the 200-day average “probably gets the animal spirits going even more,” Wilson told Bloomberg TV. “And we could see an overshoot.”

In that case, the S&P 500 could have a shot at rising as high as 4,300, but Wilson says that would still be nothing more than another bear-market rally. Already, all rebounds of at least 5% from a near-term bottom have failed to hold.

While volatile times are supposedly when active investing shines, the price of getting even a few things wrong in a market as turbulent as this one can be costly. The penalty of bad timing can be illustrated by a statistic that highlights the potential harm an investor faces by sitting out the biggest single-day gains, moves such as Thursday’s. Without the best five, for instance, the S&P 500’s loss for this year widens to 31% from 17%.

“It’s going to remain volatile. This is not the kind of market that the average person should be trying to trade,” Wilson said. “It could be very profitable if you count it right, but you know, it’s still a bear market so it can rip you apart.”

No doubt about it, this is not the kind of market that the average person should be trying to trade.

But this week, following the much anticipated US October CPI report, the only people getting ripped apart were bears and short sellers covering their positions.

The magnitude of the moves yesterday -- not just in stocks but bonds and currencies too -- were just stupendous:

Whether or not this week’s rally persists remains to be seen but it was a great week for stocks led by Technology (XLK), Materials (XME), Real Estate (XLRE), Consumer Discretionary (XLY), Financials (XLF) and Industrials (XLI).

Here are some of the tech companies I was tracking this week:



 

Not surprisingly, some of the tech stocks that got clobbered recently (like Alphabet, Amazon and Adobe) rallied the most this week. 

This I understand but some of the low quality stocks I track that got clobbered also rallied hard following the better than expected US CPI report:


That just shows you there was a giant short covering rally that took place yesterday and carried over into today on the Nasdaq which led the charge higher this week:


So where do we go from here? 

Well, the path of least resistance is definitely up in the near term but not everyone is convinced of this, including some of the bearish billionaires I've covered here that weren't impressed:

Of course we aren't out of the woods yet, an earnings recession is headed our way but these bear market rallies show you how FOMO still grips most institutional investors.

To be clear, a lot of active managers were positioned (hoping) for a rally, betting the CPI figures would come in cooler than expected. 

I myself was looking at used car prices and M2 money supply growth plunging and thought CPI would come in a bit lower:

Still, with inflation running at 7.7% year over year, the Fed will keep at it, so I'm not sure why everyone is so certain a pivot lies around the corner.

A pivot for me isn't the Fed hiking by 50 instead of 75 basis points, it's a long pause followed by rate cuts.

We aren't there yet, we are far from there.

Interestingly, Martin Roberge of Canaccord Genuity wrote this in his weekly market wrap-up:

Our focus this week is on inflation numbers released by the BLS yesterday. The key takeaway of the report is that most categories, with the notable exception of shelter, are decelerating YoY. We tackle the details of the report below. As a general observation, the good news is, headline CPI just broke below its one-year moving average (Chart of the Week, first panel). Since the 70s, each time a similar break occurred when inflation stood above 5%, it confirmed a cyclical peak in inflation. Furthermore, we calculated that bond yields fall 50bps, one year out, from these downward crosses. Hence, the good news is Thursday’s CPI report likely confirms a peak in inflation and bond yields. The bad news is similar breaks in inflation have ALWAYS coincided with a recession. Adding to the risk of a 2023 recession, the OECD release of world LEIs earlier this week suggests we may have passed the point of no return on that front with the composite falling below 99 (second panel). Thus, though the CPI report reinforces our view that inflation and bond yields have peaked, stocks’ next test will be to navigate through an economic recession without monetary injections helping to look beyond the earnings valley.

We shall see if we reached peak inflation in October but there is a lot of discussion around the big decline in health insurance inflation with some wondering if it is legitimate and others saying it is a tailwind to disinflation:

What I note is real wages declined for 19 months in a row so the Fed better hope that wage inflation doesn't pick up next year if they decide to take a long pause.

Alright, let me wrap it up there and end with some Friday humor:

And it is Remembrance Day so I join everyone who honours our fallen heroes and the brave who serve their country during times of war and peace.

Below, Steve Weiss, Jenny Harrington and Jim Lebenthal join the 'Halftime Report' to discuss buying into the rally, the Fed's agenda and investment opportunities in small caps.

Next. Tom Lee, Fundstrat Global Advisors, joins 'Closing Bell: Overtime' to discuss the market rally, rate hikes and his bullish calls on the market.

Lastly, Carl Icahn said Thursday’s relief rally didn’t change his negative view on the market, and he believes a recession is still on the horizon.

I agree with Icahn, we're still in a bear market, the Fed is far from done, and we need to prepare for a hard landing in the second half of next year, rougher markets in the first half. 

Having said this, who knows, maybe it's Good Times all over again but hedge your bets just in case!

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