Wednesday was the perfect session for a market that was looking for answers after seven trading days of whipsawing directional swings, including downside point swoons never seen before.  Fear-mongers told investors that any sign of inflation would be the death knell for the stock market.  It wasn’t! 

I’ve said the market overreacted to a 2.9% jump in wages after years of wage increase declines. 

The stage was set. 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.

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.

Ten Year Yield

I continue to ask investors to focus on fundamentals and not the hype. 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.

The Market

I love the action, especially in financials, which acted according to the script for the first time this year (orderly increases in rates should have a positive impact).  I also love the action in consumer discretionary names, including Chipotle (CMG) – we are working on a special report. Once again, I think it was material stocks that are telling the story of a nation in a rebuilding mode.

S&P 500 Index		+1.34%
Consumer Discretionary (XLY)		+1.60%
Consumer Staples (XLP)	-0.02%
Energy (XLE)		+1.45%
Financials (XLF)		+2.38%
Health Care (XLV)		+1.13%
Industrials (XLI)		+1.26%
Materials (XLB)		+1.35%
Real Estate (XLRE)	-0.63%
Technology (XLK)		+1.84%
Utilities (XLU)	-1.12%

 

Today’s Session

Equity futures have been higher all morning long, and at one point were hinting at a 300 point start for the Dow Jones Industrial Average.

The story this morning is still about earnings including Cisco (CSCO), which will lead the parade for the first time in a long time after posting fantastic financial results.

I continue to focus on strength among consumers – they are on fire, and it’s the ultimate poll because folks are voting with their pocketbooks and wallets.

There is continued concern about inflation and interest rates…at least on TV where some folks are outright begging for a market crash.

PPI was hotter than expected – we’ll comb the data for details.  Also, the Philly Fed and Empire State reports showed higher prices paid.

Speaking of the Philly Fed, the number of employees surged.  The overall trend (see chart) clearly points to greater employment this year after a long period of declines into 2017.

Comments

RE: Turnaround situation. Jakk's Pacific is the 3rd largest US toy company that was decimated in the market via writeoffs related to the TOYSRUS bankruptcy. A major Hong Kong partner has taken a major position in the company and is seeking a 51% control interest. This opens the door to the Chinese growth market. In addition, Jakk's acquire a biologic teen cosmetics company, Cést Moi, positioned in a $7 billion high gross margin sector. Jakk's is introducing the product to the market this quarter and with their strong retail relationships in Wall-Mart, Target, etc., as well as online marketing, will likely increase revenue and profitability for the balance of 2018 and beyond. It will also reduce cyclicality related to the toy market Martin Cohen on 2/15/2018 11:05:13 AM

Great job Charles! I still believe Visa has a tremendously positive unique Business Model and Position in a Global "Niche" of technology simply making physical "tangible" Cash... Obsolete...in a monetary sense, Visa is doing what "the Internet" did regarding the facilitation of communicating, operating, conducting business, affect on our personal relationships, quality of life including and especially increasing overall Productivity in virtually all aspects of life, Visa is doing and in a position to continue doing Financially with physical Cash becoming Obsolete. Thanks again for your wonderful work! Brian Feinstein on 2/15/2018 11:09:22 AM

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