Facing the Bogeyman
The story of increased fear and the bogeyman of higher yields in response to “inflation” created two 1,000+ point drubbings in the Dow over a three-session period.
Out the gate, I could sense those trying to trigger widespread fear. It was failing as the so-called fear index (VIX) collapsed, in part to stories it had been manipulated higher in the first place. I also spied market breadth where the up volume belied the story from the early decline. While the VIX was collapsing, bond yields remained elevated.
The ten-year yield spiked to 2.90%, up 17.4% year-to-date, a remarkable surge in a short period of time, but investors seemed to sober up about the notion that 3.0% means instant termination of the equity rally.
Fear-mongers have told investors that any sign of inflation would be the death knell for the stock market. It wasn’t! One financial station was so awful in its quest for hysteria (and higher ratings), trying to force each guest into agreeing this was the beginning of the end.
I’ve said the market overreacted to a 2.9% jump in wages after years of wage increase declines.
The stage was set for the CPI release. The number to watch was consensus estimate of a 0.4% monthly change and 1.9% year-to-year increase. Before the release, the Dow Jones Industrial Average futures rallied 150 points, reacting to more strong earnings, particularly from consumer discretionary names.
After the number was released, and it was 0.5% month-to-month and 2.1% from a year ago, major indices went into freefall mode. One thing you have to give to the machines is that they act quickly, never hesitating to think outside their own programming and algorithms.
However, just because there is a jump in wages, it doesn’t mean we are anywhere near wage inflation. The change in consumer prices remains well below levels over the past decade. In fact, the Fed has to be patient with any urge to blunt increasing rates despite criticism of being late in the past. Being early would also be an equally dangerous mistake.
I continue to ask investors to focus on fundamentals and not the hype.
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