Higher Inflation Data, Expected Earnings Put Dow on Catapult: Pulled Down 150 Before Vaulting 250 Points

Markets initially traded lower reacting to inflation data published this morning by the Bureau of Labor Statistics, which showed prices rising quicker than experts forecasted, but rallied 250 points as bank stocks led the index higher.

A key indicator of inflation, the consumer price index (CPI), rose 0.3 percent higher than expected to 2.1 percent for January versus a year ago. Core CPI, which doesn’t include volatile energy and food prices, edged up a tenth more than forecast to 1.8 percent, as prices tick closer to the Fed’s 2 percent goal for inflation.

Prior month comparisons showed CPI rising 0.2 percent more than expected in January to 0.5 percent as compared to December, while core CPI increased 0.1 percent more than forecast to reach 0.3 percent versus December’s numbers.

The news had investors punching the sell button in early trading: The Dow Jones Industrial Average (DJIA) dropped 150 points before rebounding to gain 250 points, as investors continued to sort out the impacts on equities of the Fed’s expected interest rate hikes.

Slated to begin in March, the rate increases are aimed at controlling inflation.

Stocks tend to dip when interest rates rise in part because companies borrow money to expand, so more expensive debt can curb growth. The bull market has also lasted now nine years, and many say valuations are overblown or that past cycles suggest it’s time for a correction.

However, investment banks stand to profit from rising interest rates and increased bond issuance, and Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. were among gainers in the index. Investors also seemed to have absorbed rate fears and appear to have refocused on what seems a relatively healthy earnings and employment picture.

The Fed had slashed rates over a nine-and-a-half-year period to near zero to combat the effects of the Great Recession to encourage employers to borrow money to invest in their businesses, including hopefully, hiring workers. 

After the economy strengthened, the Fed raised rates for the first time in December 2015. Now, as jobs data purports to show unemployment at its lowest level in decades, the Fed’s concerns shift to reining in inflation.

Still, the return of volatility and last week’s 1,000-point gyrations in the Dow, including Thursday’s close when the index entered correction territory – trading down 10 percent from its high – have made our stock markets seem an uncrackable cipher for some, even seasoned investors.

Take the following response we got last week when we asked a New York-based portfolio manager at a hedge fund with over $200 million in assets under management what he made of the whipsawing U.S. stock markets.

“I haven’t got a clue. But I’ll tell you this: I’ve moved all of my own investments into cash, money markets.”

Such a panicked flight-to-safety (cash!) implied here from a professional investor can sap one’s confidence that it’s simply market fundamentals at work, and not something less apparent causing pessimism among experienced traders.

Yet juxtapose this money manager’s risk-averse attitude with the calm displayed by a semi-retired , 68-year-old salesman, who trades a portion of his retirement assets himself.

He remains allocated to 80 percent stocks, 10 percent bonds and 10 percent cash. The following is what he typed after we asked him via text what he was doing in response to the pogoing market:

“Doing what I always do. Looking for value.”

Which is to say he was calmly looking for undervalued stocks to buy, amid a whipsawing market; he wasn’t selling.

Both of these fellows are value investors, yet both are doing the complete opposite of one another in dealing with market volatility. Although the older retail investor said he regretted he hadn’t locked in profits from the bull market by selling some before volatility returned.

The Fed, meanwhile, is faced as always with a delicate balance in fulfilling its mission, which was stated clearly yesterday by new Fed Chair Jerome H. Powell, in a speech he made at his ceremonial swearing-in:

“The Congress has assigned the Federal Reserve the goals of stable prices and maximum employment,” Powell said. “Price stability means that businesses and households can make important decisions without concern for high or volatile inflation. Maximum employment means that those who want a job either have one or can find one reasonably quickly.”

Whether the Fed is truly reaching these goals, and more specifically, whether the jobs data truly matches the American employment reality is unclear.

 

Shane Kite

This Brooklynite covers music, art, film, finance, technology, politics, small business, economics, clean energy, national security and local and foreign affairs.

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