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Not Feeling the Burn Yet



Chief Market Analyst

It was a good day yesterday for the pro-cyclical trade, yet the weakness that prevailed in many of the mega-cap shares and other growth stocks left the S&P 500 flat for the session. The latter left the wrong impression that it wasn’t a good day for the market, yet a 0.8% increase in the Invesco S&P 500 Equal Weight ETF (RSP) told the real story.

The story this morning isn’t so much that it is going to be a bad day all around as it is that it will be a soft start all around. That’s the impression one gets looking at the futures market.

Currently, the futures for the major indices are 0.1-0.2% lower, which should translate into modest losses across the board when the opening bell rings.

The go-to excuse is that the stock market is primed for a consolidation period and is being confronted with some profit-taking interest. That’s a reasonable excuse — and explanation — but the other factor jumping out in the futures market is that there isn’t a rush to the profit-taking exit.

Market participants haven’t convinced themselves that the market is simply going to roll over and play dead. More likely, it is convincing itself that it will keep on living with money rotating from growth to value, countercyclical to cyclical, mega cap to small cap, and stay-at-home to reopening plays.

The end result in such a situation is more churning than burning at the index level.

It has helped somewhat that the Treasury market has calmed down (sort of). The 10-yr note, which ended last year at 0.92%, made a beeline to 1.187% at yesterday’s high before drawing some relief in the wake of a 10-yr note auction that was met with strong demand. 

The yield on the 10-yr note has backed up to 1.12% and didn’t react much to the December CPI report, which was in-line with expectations.

Total CPI increased 0.4% m/m ( consensus 0.4%) while core CPI increased 0.1% m/m ( consensus 0.1%). The uptick in total CPI was driven largely by an 8.4% increase in the gasoline index, which accounted for more than 60% of the overall increase. The food and food away from home indexes, though, both jumped 0.4%.

The key takeaway from the report is that it won’t trigger inflation alarm bells in an aggregate sense. Total CPI is up just 1.4% yr/yr, versus 1.2% in November, while core CPI held steady at 1.2% yr/yr for the third straight month.

The latter views notwithstanding, inflation worries — both real and imagined — promise to be a pressing issue throughout the year. For now, though, this data isn’t pressing on either the stock or bond markets.

One helpful distraction is the understanding that President-elect Biden is expected to release an economic plan tomorrow and that Fed Chair Powell will be speaking on Thursday as well. There is an underlying assumption that both will be deemed support factors for the market.

Separately, the House passed a resolution last night calling on Vice President Pence to invoke the 25th Amendment with the aim of removing President Trump from office. The vice president said he would not do that, so the House is proceeding today with a vote to impeach the president.

The impeachment dealings in Washington are generating a lot of attention, yet they have not generated any meaningful reaction in the market which is still holding near record-high levels. The Russell 2000 for its part closed yesterday at a record high.

Originally Posted on January 13, 2021 – Not Feeling the Burn Yet

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