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Week in Review: Stock Market “Inflation”

The stock market saw some real inflation this week, largely because it saw signs of disinflation in the Consumer Price Index (CPI), Producer Price Index (PPI), and Import-Export Price Index reports for July. They all went the market’s way, which is to say they supported the peak inflation narrative.

The gains were broad based and substantive. The S&P 500 scored its fourth straight weekly advance and crossed an important level (4,231) that some will interpret as a telltale signal that the low in June was the low for the bear market.

Notably, the week’s gains were secured almost entirely over two trading sessions (Wednesday and Friday). Prior to Wednesday, which is when the CPI report was released, the major indices were all sporting losses for the week. The tepid start was attributed to reservations about the market being due for a pullback after the big run off the mid-June lows, some caustic revenue warnings from NVIDIA (NVDA) and Micron (MU), and some nervousness in front of the CPI report.

The latter, though, proved to be a major turning point for sentiment. Total CPI was unchanged month-over-month and core CPI, which excludes food and energy, was up a smaller-than-expected 0.3%. Importantly, the annual pace of total CPI moderated to 8.5% from 9.1% while the annual pace of core CPI held steady at 5.9%, meaning it did not move higher as had been feared.

This understanding triggered a huge upswing in the major indices, as investors relished the idea that inflation might have peaked, that the Fed might be able to temper the pace of its rate hikes, and that the U.S. economy, which learned last week that 528,000 positions had been added to nonfarm payrolls in July, might be able to enjoy a soft landing.

Various Fed officials attempted to downplay the idea of the Fed being ready to take its foot off the rate-hike pedal, not to mention pivoting in 2023 to a rate-cut cycle, yet equity market participants seemed to disregard the warnings.

Notwithstanding such warnings, the prevailing view in the stock market was that inflation rates will continue to moderate in coming months and that Fed officials will ultimately be convinced to soften their hawkish-minded tone as a result. It only helped the stock market’s mood to see the PPI data and Import-Export price data move in the same direction as the CPI data.

Granted stocks were unable to hold a rally effort in the wake of the PPI report on Thursday, but by Friday morning, that move had been written off as just a case of taking some money off the table after a big move. Come Friday buyers were back in action while sellers were a mostly sidelined bunch.

The major indices all went out on a high note in a grinding rally effort on Friday that wasn’t matched with heavy volume but which was impressively resilient nonetheless. The S&P 500, which was flirting with 3,600 in mid-June, settled Friday at 4,280. The close above 4,231 will be seen by some as an important technical and psychological development. That level marked a 50% retracement of the losses suffered between the January 3 closing level (4,796.56) and the June 16 closing level (3,666.77).

Last week, BTIG technical analyst, Jonathan Krinsky, informed CNBC that “Since 1950 there has never been a bear market rally that exceeded the 50% retracement and then gone on to make new cycle lows.” That doesn’t mean it is off to the races from here nor does it mean the market is immune from another selloff of some size, but it does resonate for some as a beacon of identifiable downside risk and a reassuring historical precedent.

All 11 S&P 500 sectors closed higher for the week. Gains ranged from 1.2% (consumer staples) to 7.1% (energy). Cyclical sectors saw some of the biggest gains and value stocks out-legged growth stocks in a move that showed reduced fears about the economy suffering a hard landing. The Russell 3000 Value Index increased 3.9% versus a 3.0% gain for the Russell 3000 Growth Index.

There was also a revival this week of speculative activity that translated into huge percentage gains for many of the so-called meme stocks, as well as the SPAC and profitless story stocks that were all the rage last year. Their moves were clear reflections of a risk-on mindset driven by the hope that the Fed won’t have to go as far as it thinks into restrictive rate-hike territory.

The Treasury market wasn’t as convinced of that point as the stock market seemed to be. The 2-yr note yield, which is sensitive to changes in the fed funds rate, ended the week up two basis points at 3.25%, virtually unchanged from where it was when the CPI report was released on Wednesday. The 10-yr note yield settled the week up one basis point at 2.84%, up about five basis points from where it was trading before the release of the CPI report.

To be sure, inflation moderated in a welcome development, but it is still unacceptably high. The Fed’s inflation target is 2.0%, whereas CPI is up 8.5% year-over-year and PPI is up 9.8% year-over-year. There is a lot more room for inflation improvement and there needs to be a lot more improvement to convince the Federal Reserve that inflation is back under control.

That will be an ongoing war, but there was no doubt that the stock market won the mental battle this week in seeing what it wanted to see, which was a lower inflation rate in July than it saw in June.

  • Dow Jones Industrial Average: -7.1% YTD
  • S&P Midcap 400: -8.0% YTD
  • S&P 500: -10.2% YTD
  • Russell 2000: -10.2% YTD
  • Nasdaq Composite: -16.6% YTD

Source: Briefing Investor


Mike Minter

As Chief Investment Officer, Mike directs the overall investment strategy, develops portfolio allocations, oversees trading and rebalancing, and conducts research and analysis. As a perpetual student of investing and the markets, Mike considers himself obsessed with the subject. He has earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) and Certified Fund Specialist® designations. He is also an active member of the Houston chapter of the Financial Planning Association (FPA).   Read Mike’s Profile HereRead More Articles by Mike

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