Decent CPI Averts Friday 13th Horror (For Now?)

This Friday the 13^th had the potential to be an ugly one.  Typically, after a sloppy close that saw a substantial decline close near its lows, we might expect to see some reflexive bargain hunting in pre-market trading.  This morning, we didn’t.  It appeared that traders were concerned about the possibility that a poor CPI report could launch another round of aggressive selling.  Instead, the headline was a bit better than expected, and stocks instead got off to a middling start.

Although Core CPI came in with an as-expected and unchanged 0.3% rise, the headline report showed a bump of only 0.2%.  That was 0.1% better than the 0.3% prior figure and consensus estimate.  We can nitpick and say that the improvement was overstated by rounding, since last month’s rise was really 0.27% and today’s was 0.24% when calculated to two decimal places, but the direction of travel is favorable, nonetheless.  Treasuries took the news positively, with yields falling about 4 basis points across the curve. 

The improvement at the short end reflects slightly higher expectations for Fed cuts.  The first month with a full probability for a cut remains in July (after a recent brief flirtation with June), but Fed Funds futures now show a greater than 50% chance for a third cut by December.  Meanwhile, the improvement at the long end reflects improving expectations for future inflation.  One of my rules of thumb is to look to the bond market when it comes to interpreting economic data.   Treasury bond traders are laser-focused on government data, particularly when it affects inflation and the probability of rate cuts.  If they’re OK with the data, so too should stock traders.

Yet stock traders are indeed only OK with the data so far.  We’ve spent the first 1.5 hours of the session meandering around unchanged, unable to establish a meaningful intraday trend in either direction.  That’s not a terrible thing, by the way.  We managed to get past 10:30 without a reversal, something that has occurred with some frequency recently.  That leaves the field wide open for the rest of the day.

It is important to remember that while the S&P 500 (SPX) is essentially flat for the year-to-date and the underperforming Nasdaq 100 (NDX) is only -3% in the red, it is not as though we have experienced a meaningful pullback, let alone a correction.  Small- and midcap stock indices are generally higher by a few percent.  Much of the edgy sentiment is related less to the movements of the top-line indices than to the type of names that are underperforming, and the manner in which some sectors have been pushed off metaphorical cliffs by AI-fearing investors.

Several major stocks and key sectors have indeed been hit, some harder than others, of course.   One thing hurting many investors’ psyches is the fact that all the Mag 7 stocks plus Broadcom (AVGO) are down since the calendar turned.  Most are not appreciably worse, though Microsoft (MSFT) and Amazon (AMZN) are notable underperformers.  Yet some of the market-matching performers, like Alphabet (GOOGL) and Meta Platforms (META), are doing so only after giving back sizable recent gains.

Year-to-date Normalized Performance: AAPL (white), AMZN (red), AVGO (magenta), GOOGL (purple), META (yellow), MSFT (dark blue), NVDA (light blue), TSLA (orange)

Source: Bloomberg

It is useful to know that although we have seen some scary sequential downswings in software, insurance, wealth management, and real estate stocks recently, the eye-popping volatility is not strictly one-sided.  We have seen plenty of “socially acceptable volatility” too.  Much of the discussion has surrounded the big moves to the downside, but there has been no shortage of violent upsurges as well.  For all the “get me out” trades we’ve seen this week, there have been several of the “get me in” variety.

For example, while real estate brokers like CBRE and some commercial landlords got punished, Equinix (EQIX), a REIT that specializes in data centers, shot up more than 10% yesterday.  That brought its year-to-date advance to a stunning 25%.  Today alone, we have Applied Materials (AMAT), Coinbase (COIN), and Rivian (RIVN) showing double-digit, post-earnings percentage gains.  The bounces are emblematic of the “buy and chase” mentality that we have seen in recent years.  Aggressive traders are no longer satisfied with a modest rally – they see the need to pile in aggressively.  FOMO is far from dead.  (And, in the time it took me to write this piece, tentative dip buyers have provided a bit of a lift to SPX and NDX.)