You would not be blamed for being confused after last week’s price action in the U.S. stock markets.
The U.S. Consumer Price Index (CPI) data released on Tuesday, 13th July, 2021, was the largest increase since 2008.
According to the U.S. Labor Department, the CPI jumped 0.9% in June and 5.4% from the same month last year. Meanwhile, the core CPI, which excludes food and energy, rose 4.5% from June 2020, holding the largest record since November 1991.
Following that, the market made new highs for the S&P.
It is not a normal response. But, like I said before, when the market wants to go up, good news is good news and bad news is good news.
In addition, it could have also been that the markets were expecting Fed Chairman Powell to repeat his comments about inflation being transitory over the next 2 days. Which he did.
He said it was still too soon to scale back support for the U.S. economy.
Enter Janet Yellen. On Thursday, 15th July, 2021, after the market closed, she said, “we will have several more months of rapid inflation,” which the markets took as bearish and followed through to the close on Friday.
In the midst of this, we had the release of quarterly earnings starting from the big banks.
Goldman Sachs posted strong revenue from mergers and acquisitions which countered the drop in trading revenue. However, the stock traded lower because the market thinks that the following months will be challenging for the Major banks and earnings will likely start to fall.
Let’s look at the closing on Friday:-
Dow Jones 34687.85 -299.17 -0.86%
S&P 500 4327.16 -32.87 -0.75%
Nasdaq Comp 14427.24 -115.90 -0.80%
US 10Y 1.30%
VIX 18.45 +8.47%
You should not be surprised to see more weakness in the U.S. stock markets as the coronavirus cases are increasing around the world.
Inflation – which is still at the back of many minds – may also pose a risk.
Those in the bullish camp will continue to think that inflation is transitory, and also focus on job growth numbers, as well as upcoming stimulus packages.
It is too soon to call it a reversal in trend for now.
We will have to monitor if this is a healthy pullback to wash out the weak longs, and then only re-establish its uptrend or a beginning of a much bigger correction.
Source: CBOE, Reuters, Bloomberg
This commentary is written by James Gomes
James has been in the finance industry for over 30 years and most recently worked for a large US bank for more than 20 years.
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