This is the conclusion of today's Morning Brief, which you can read Log in Delivered to your inbox every morning, along with:
Stock prices rebounded on Wednesday, recouping some of the steep losses suffered on Tuesday after higher-than-expected inflation numbers in the morning. Small caps led the way, with the Russell 2000 (^RUT) gaining over 2% after suffering its worst day in years.
But the bigger question for investors remains: Was Tuesday's crash an isolated incident or the start of something bigger?
The overall evidence suggests that this is a short-term decline with new record highs set to be reached in a few weeks – in other words, a buying opportunity.
And regardless of what the economic data turns out to be over the next few weeks, it wouldn't be unusual to see the S&P 500 experience a pullback after a blistering 20 percent rally from October lows, especially as we look at the calendar.
Ryan Detrick, chief market strategist at Carson Group, said: noted on XThe next four weeks on the calendar have historically not been great in the fourth year of a presidential term.
And with the index having gained ground 14 times in the last 15 weeks, a breather is to be expected.
“Seasonal weakness is normal,” Detrick wrote.
However, tail risks are real, downside risks are non-trivial, and the best strategies are very nuanced.
By and large, the narratives driving soft landing expectations have not changed much recently.
As Austan Goolsbee, president of the Chicago Federal Reserve, said Wednesday, “Let's not be alarmed if the CPI is higher than expected for a month.”
Meanwhile, earnings growth, the engine of any bull market, remains strong – and the growth isn't just limited to the Magnificent Seven, although they definitely help.
Furthermore, most inflation metrics still show a downward trend. Tuesday's headlines and core data may have pleasantly surprised expectations, but year-over-year trends in both metrics are trending downward.
The story goes on
Looking at the reaction in Fed funds futures, Tuesday's inflation surprise only offset about half of a 25 basis point rate cut.
But looking at the CPI report and measuring some numbers over shorter time frames reveals some trends that are making some investors sleepy. So-called supercore inflation, which measures inflation in core services after housing cuts, has risen sharply.
This inflation rate, often mentioned by Fed Chairman Powell, fell from an annual rate of 8% to 3% at the end of last year, but has risen again to 5.5%. “This is not good news for the markets,” Alfonso Peccatiello, owner of The Macro Compass, said on X.
And if overall inflation rises, it could bring back into focus the “no-landing” scenario that rattled investors and roiled markets in mid-2023.
In the meantime, expectations of Fed rate cuts are driving the price, and the timing of those rate cuts is far less important than the fact that investors expect the next rate move to be lower.
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