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Stocks Moved Higher as Investors Waited for Thursday’s CPI Report: Market Commentary from Cabana’s CEO – July 12, 2024  

5 months ago

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Stocks have moved higher over the past week, once again led by “Big Tech”. Bonds and corresponding yields have mainly stayed put. All this has occurred as investors waited for the release of Thursday’s June CPI report.  

Analysts were predicting a further drop in inflation compared to May (MOM or month-over-month) and this time last year (YOY or year-over-year). Well, at 8:30 ET Thursday morning, we got the report, and it showed inflation slowing more than even expected. The YOY number was 3% vs. 3.3% in May. The MOM number was 0.1%, down from 0.3% in May. This “disinflation” was seen across the board (Core and Super Core) and is strong evidence that we are on the path to the Fed’s target of 2%. It also shows in a pretty big way that the economy is slowing. Falling inflation is good and gives the Fed room to cut rates going forward. A slowing economy is good so long as it doesn’t slow too much. Therein lies the dilemma faced by our Central Bank, and by extension, investors as a whole. What at first seems like good news may not be so good after all. Maybe inflation is falling too fast now as a result of latent weakness out there.  

We just saw unemployment jump to 4.1% after hitting a low of 3.4% last year. A rise in the unemployment rate of more than 50bps has historically signaled a recession. While there is no precedent to what we have experienced over the past four years, it is food for thought.  

Markets responded to this news with some quick selling out of Big Tech and corresponding buying of more defensive (and lagging) sectors. I have been waiting for some rotation out of tech into everything else and I believe it is long overdue. I also believe that this type of rotation is necessary for this bull market to roll on. I won’t beat this horse any more here, as I have said all this previously. Maybe this disinflation and perceived “weakness” will be the impetus we need for some market breadth to expand.  

I feel like yesterday’s report puts us in the final innings of this long re-set of interest rates and even the fallout of all that was the pandemic. We may get some correction in stocks here (particularly tech), but bond prices could benefit as should a lot of other sectors that have been left behind in the AI euphoria of the past two years. To me, this was a much-needed data point and good news for the bond market after three plus years of a brutal beating. 

At Cabana, we remain bullish. 

Key terms:  

  • Big Tech, also known as the Tech Giants or Tech Titans, are the largest IT companies in the world. 
  • Disinflation is what happens when the inflation rate falls but remains positive. In disinflation, prices continue to increase but at a slower rate.  
  • Core inflation represents the long run trend in the price level. 
  • Super Core inflation measure focuses on the prices of services, specifically those influenced by labor costs. It excludes housing expenses, which can be volatile. Think of services like haircuts, cleaning services, childcare, and gym memberships.  
  • A basis point is a standard measure for interest rates and other percentages in finance. 
     
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January 17, 2024

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