Inflation Doesn't Seem To Faze Stocks

Inflation data surprised, but markets forged ahead.

Both the Consumer Price Index and Producer Price Index data were higher than expected. Each inflation measure was expected to rise by only 0.3% for January, but the CPI was higher by 0.5% and the PPI was higher by 0.4%. The data caused a shift in thinking among investors as to the next Fed move. The June Fed meeting has been forecast by the market as a potential rate cut, but Fed Futures moved higher in the favor of no rate cut in June. This fact didn't seem to faze stocks are almost all equity sectors were higher last week. Overall, inflation data is running just below the historical average. However, the bigger question is what if any effect inflation is having on the consumer. Retail Sales in January were much lower than expected, -0.9% versus -0.2% expected. The Labor Market seems to be holding steady for now and interest rates have naturally eased without the Fed (10-yr Treasury & 30-yr Mortgage off mid-January highs).

Meanwhile, markets seem to be adjusting to recent shocks to Mag 7 names. The Mag 7 stocks are under-performing the S&P 500 Equal-Weighted Index by 150 basis points this

year. Since Dec 3rd of last year, the Mag 7 stocks have been a bit range-bound, while the Equal-Weighted Index has bounced back nicely. In addition, the top 10 names of the S&P 500 Index, based on capitalization weighting have also led the index higher over the past two years. Yet, so far this year, the top 10 names are up only 2%, on-average, for the year, while the next 10 names are up, on-average, 11% for the year. The breadth of the rest of the market is improving as well. The numbers of stocks advancing in the S&P 1500 Index versus the number of stocks declining stands at 1,232. In other words, more than 82% of the index is moving higher. As fundamentals become more important, investors would be wise to shift away from over-valued sectors/positions. Expect volatility to begin to pick up as seasonality would suggest a worse 2nd half to February and higher VIX values.

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