After spinning its wheels most of the session on Thursday, the Dow Jones Industrial Average tumbled into the close along with the S&P 500, leaving the NASDAQ and Russell 2000 in the plus column. All the major equity indices are near record high levels. It’s not unusual for an individual stock or index to pullback after several unsuccessful attempts to break through key resistance points.

I’m not sure that will happen this time.  As it stands now, there must be a few runs at records for the market indices.  As for luring cash off the sidelines, that happens with big breakouts, which trigger a sense that the train is leaving the station.  For now, there is an eerie calm that’s part midsummer blahs, part never-ending fear-mongering, and part of a need for clear catalysts.

I think it would be a mistake to confuse this calm with overconfidence or complacency. 

Investors are aware of all the issues. The market isn’t ignoring the cries of those that promised a market crash at the onset of the tariff battle. Instead, the market sees the big picture - and it’s a marvelous picture, indeed.

S&P 500

The Fed continues to wind down its balance sheet. In the most recent week, it climbed $2.4 billion to $4.258 trillion. Since October, the Fed has managed to shed $202.4 billion from its balance sheet, but the problem has been mortgage-backed securities (MBS). These weapons of mass destruction were at the heart of the financial meltdown are proving tougher to shed than expected.

The experts were looking for an MBS balance of $1.680 trillion by the end of July; instead, it’s hovering at $1.710 trillion, down $58.6 billion since October. There is a growing chorus of mavens that are saying the Fed should be more aggressive at hiking rates, so they have the tools to fight the next recession, which they create from being too aggressive with their rate hikes.

You get the picture.

Today’ Session

July CPI was up 0.2% in July, in-line with consensus. Year over year, its up 2.9%, unchanged from June.  However, core-CPI, which excludes food and energy, also increased 0.2%, and year over year, it is up 2.4%, the hottest read since September 2008.  This read is above the Fed’s longer-term inflation target and adds further fuel to the potential for aggressive rate hikes.

• Food index +0.1%
• Energy index -0.5%
• Shelter index +0.3% (approximately 60% of the monthly increase in the all items index)
• Used cars and trucks index +1.3% after rising + 0.7% in June 

The markets are under pressure this morning and all the major indices are firmly in the red as the Turkish lira plummets and inflation jitters weigh on investors.