We got a wild ride yesterday in the US market. The closely watched CPI numbers, both headline and core, came in hotter than what economists had forecast. The initial market reaction was fast and furious. The S&P 500 and Treasury futures plunged rapidly with the former dropping more than 2% off its previous close at one point in time. This reaction was probably in line with what many would have anticipated. But what came up next probably caught these people off guard. The stock market reversed quickly to rally strongly across the board. The sea of red became a sea of green. S&P 500 eventually ended up 2.6% on this wild day.
Why and what happened? Those who read the headline on Bloomberg “Hot US Inflation Torches Bears…” are most likely having their WTF moment. Hot inflation with yields moving up and Fed Funds futures now pricing in 75 bps hike for both November and December FOMCs and the stock market is celebrating?!
Many “theories” abound. Some say it's technical because S&P 500 breached the 50% Fibonacci retracement level from its 2020 lows. You can always explain something off technicals with tons of indicators at your disposal. And some say the data suggests that inflation has probably peaked. But that is not a new narrative. Then there are others who rationalized that market has priced in a worse scenario and things turn out to be better. Yes, possible. But at the end of the day, we don’t really know what is the primary driver. All we know is there are strong buying and short coverings.
Will this mark a change in the sentiments for stocks? Shorters may be cautious to enter now but there does not seem to be any change in the fundamentals or situation. So does that mean we have all overestimated the fear and downsides? I prefer not to guess. These wild rides have always been part and parcel of the stock markets. And we will likely see more of it ahead. If you want some sanity amidst all this chaos, then try looking at the bond markets.
