After The Close - The outcome was in doubt early on, but stocks shrugged off another inflation scare to finish the day sharply higher. At the close, the Dow Jones Industrial Average was up 253 points; the NASDAQ gained 130 points, which was a better showing on a percentage basis than the Dow; and the S&P 500 finished ahead by 36 points. Market breadth confirmed the upturn, as advancing issues outpaced decliners by better-than a two-to-one margin.
Before the opening bell, the Labor Department reported that inflation at the consumer level in January rose 0.5% overall, with the core rate (excluding food and energy costs) rising 0.3%. Both readings were higher than expected, initially causing consternation for investors as trading began. At one point, the Dow Industrials were off about 150 points.
But the market seemed to reassess the situation, taking a broader view to include the fact that inflation on an annual basis was both unchanged and contained for the headline number and for the core rate. Retail sales for January were disappointing, too, with the data indicating the biggest drop in nearly a year, possibly weather related. The weak retail sales figure had some economists revising lower their expectations for first quarter GDP growth. There also may have been a feeling that last week’s selloff provided a buying opportunity.
Stocks rose despite a rise in interest rates. The yield on the benchmark 10-year Treasury note reached its highest level in four years, touching 2.91%. Still, rising rates did put further pressure on interest-rate sensitive groups, such as utilities and real estate investment trusts, which have been performing poorly in recent weeks. Bank stocks did well, though.
Regarding interest rates, investors will be watching new Federal Reserve Chairman Jay Powell’s testimony before Congress at the end of February for clues as to the Fed’s views. The current thinking is that the central bank will raise rates three or four times in 2018, including at its meeting next month.
Broadly, while the market focus has shifted to include concerns about inflation and interest rates, expectations for strong earnings provide a compelling counterpoint, unless perhaps rates were to rise too quickly.
In corporate news, shares of retailer Fossil (FOSL) surged on better-than-expected earnings. Elsewhere, Chipotle Mexican Grill (CMG) advanced notably on word that it has hired a new CEO. - Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned.
Before The Bell - Volatility remains the name of the game on Wall Street, as up-and-down moves in the stock market continue to grab the headlines. And this may well be the case for some time, as confidence, so high as recently as January 26th, when further records were set by the leading averages, has eroded somewhat in the face of several major declines and partially offsetting rallies. On point, after the equity market fell dramatically last week, a nice comeback rally on Friday afternoon and a follow-up jump on Monday had helped to revive sentiment just a bit. However, the stock market sold off again yesterday morning, once more on weakening confidence.
As before, the downtrend was interest-rate driven. Specifically, while rates eased back a bit yesterday, from the four-year high of 2.88% set again on Monday in the 10-year Treasury note, the threat of rising inflation has investors on edge. Clearly, the Federal Reserve is looking at inflation and economic growth data with an eye toward raising the federal funds rate target at its next meeting on March 20th and 21st. We believe such action will be the first of as many as four rate hikes this year. In any event, such worries drove the Dow Jones Industrial Average down by as many as 180 points early in the session.
The market, however, did try to rally, with the Dow retracing all but some 50 points of that early setback by mid-morning. But the selling soon resumed, so that as we neared the noon hour in New York, that 30-stock composite was lower by close to 100 points again. However, the NASDAQ was off just incrementally. Thus, while the market had a downward bias to it, there was no wholesale rush to sell. In all, declining issues held about a four-to-three lead on advancing issues. So, again there was no major move to the exits, although the exaggerated interim-day price movements continued to be unsettling to many.
The market's advance then stalled for a while, with the Dow's aforementioned 100-point gain largely eroding, before a second round of modest buying followed, the latest reversal then persisted into the early afternoon, with the Dow continuing to be down about 100 points. However, we moved inside the final two-and-a-half hours of the trading day, a turnaround suddenly got under way, and within a half hour's time, all of the averages had turned positive, with the Dow shooting ahead by 100 points, or so. Gaining and losing stocks, which earlier had favored the latter were in balance, with gains in the basic materials, industrials (led by Caterpillar (CAT - Free Caterpillar Stock Report)), and financials leading the way, while notable laggards included the higher yielding telecom and utility groups.
The market then essentially marked time into the close, with the averages all staying positive, but not breaking new ground for the day. At the close, the Dow, which again was the most volatile index, posted an advance of 39 points; the S&P 500 Index climbed a modest seven points; and the NASDAQ gained 32 points, or almost half a percentage point. The caution at the end reflected worries about this morning's just-released Consumer Price Index report, which some have called the most critical such release in a decade, given the well-chronicled, if thus far, modest, uptick in pricing pressures.
As to that report, it showed that the CPI, which had been forecast to rise by 0.4% last month, actually gained 0.5%. Meanwhile, the so-called core CPI, which backs out food and energy, and which was seen as heading higher by 0.2%, jumped 0.3%. As to the response, the U.S. equity futures up more than 100 points in the Dow before the release, tumbled to a loss of almost 250 points on growing inflation fears. This major reversal, if sustained, would mean a markedly lower opening when trading resumes minutes from now. Finally, in another release issued at that time, the Commerce Department reported that retail sales had fallen unexpectedly last month; a modest increase had been the forecast. It was a perfect storm for the bears, therefore, of weaker business growth and higher inflation. Although these data points may be outliers to a degree, they still are worrisome, and could mean a faster response by the Fed. Time will tell. - Harvey S. Katz, CFA