Encouraging Economic Data Sends Stocks Sharply Higher

Key Takeaways

• Stocks Rally Sharply Higher On CPI Report
• History Suggests Stocks Could Finish Year Strong
• Government Shutdown Avoided For Now

Stocks and bonds soared higher Tuesday following a weaker than expected Consumer Price Index (CPI) report. The Russell 2000 was the strongest index for the day, gaining 5%. That was followed by the Nasdaq Composite and S&P 500 which were up 2.4% and 2%, respectively. The yield on the 10-year note dropped as well, closing at 4.44%.

The most recent CPI data showed inflation is cooling with prices remaining flat on a month-over-month basis. On a year-over-year basis, prices were up 3.2%, which was down from the prior reading of 3.3%. The more tepid rate of inflation is lending credence to what many have called a soft landing where interest rates increase, inflation comes under control, while at the same time, the economy avoids slipping into recession.

Heading into yesterday’s report, expectations that the Federal Reserve Open Market Committee (FOMC) would leave rates unchanged at their next meeting in December stood at 86%. Following the report’s release, those probabilities jumped to 95% according to data from the CME. We also saw an uptick in optimism the Fed may even cut rates later next year with a 75% chance of a cut by June.

The surge in equity prices could bode well for investors over the remainder of the year. According to an article by Bloomberg, when stocks are up 5% or more by mid-November, the remainder of the year was also positive in twenty-two of the last twenty-two years. If you go back fifty years, stocks added to gains twenty-six out of thirty times. There were four other instances where stocks were up 5% but lost ground after; however, those losses were less than 1% each time. While there are no guarantees when it comes to equity prices, the data is encouraging.

There was also news out of Washington as the House passed a bill that will extend government funding into early 2024. The bill, if passed in both the Senate and then signed by President Biden, would keep government spending at current levels for some agencies until January and others until February. I don’t necessarily see this as a positive or negative for the market. We’ve simply kicked the can down the road a bit and is something that will have to be dealt with sooner or later. Since 2024 is an election year, I don’t expect the negotiations over spending to be a kumbaya moment.

Yesterday’s rally saw the U.S. dollar fall 1.5% while the VIX also fell by 4%. Premarket, shares of Target
TGT
are higher by 14% following stronger than expected earnings and a holiday outlook that sees sales roughly in line with last year. The latest Producer Price Index (PPI) and Retails Sales numbers are out this morning. It’s a bit of a mixed bag with PPI coming in slightly weaker than expected, while Retail Sales were slightly better than expected. The reports have bonds trading down nearly a full point in premarket, while stocks are up slightly. As always, I would stick with your investing strategy and long term plans.