PAS Weekly Commentary

Inflation Jitters Send Market Lower, but Investors Buy the Dip at the End of the

The stock market finished the week in negative territory, but it could have been a lot worse after hot inflation data upset the market mid-week. The Nasdaq Composite (-2.3%) and Russell 2000 (-2.1%) were this week's losers with losses over 2.0% while the S&P 500 (-1.4%) and Dow Jones Industrial Average (-1.1%) declined closer to 1%.

Through the first three sessions of the week, the Dow was down 3.4%, the S&P 500 was down 4.0%, the Nasdaq was down 5.2%, and the Russell 2000 was down 6.0%. Over the next two days, the Dow gained 2.4%, the Nasdaq gained 3.0%, the S&P 500 gained 2.7%, and the Russell 2000 gained 4.2%.

The horrible start was attributed to negative momentum in the growth stocks, rotational factors, and a noticeably hot Consumer Price Index (CPI) report on Wednesday. The m/m changes in consumer prices exceeded expectations, and when looking at the last six months to exclude easy base effect comparisons, total CPI was running at an annualized pace of 5.0%.

Investors used the weakness as an opportunity to buy the dip with a little help from several factors:

  • A retracement in long-term interest rates, signaling that the Treasury market wasn't concerned about inflation even after receiving additional hot inflation data apart from the CPI report.
  • Apple (AAPL) reclaiming its 200-day moving average (123.28) and the S&P 500 respecting its 50-day moving average (4064).
  • The CDC saying fully vaccinated people can engage in most activities without masks.
  • A view that the market was oversold on a short-term basis and was likely due for a bounce.

Eight of the 11 S&P 500 sectors still ended in negative territory, though, including the consumer discretionary (-3.7%), information technology (-2.2%), and communication services (-2.0%) sectors amid weakness in their mega-cap components. The consumer staples (+0.4%), financials (+0.3%), and materials (+0.1%) sectors closed higher.

It'll be interesting to see how the growth/technology stocks perform moving forward when money has been flowing into the cyclical/value stocks on reopening/inflation expectations and analysts have been calling for sustained underperformance. Many growth stocks are down substantially from their peaks in February.

The 10-yr yield increased six basis points to 1.64% from last Friday's settlement, but this was below the 1.70% settlement on Wednesday. Copper prices decreased 2% to $4.648/lb., representing many of the commodities that cooled off this week.

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2021-121421 (Exp 8/21)