I’ve begun to wonder how many of you hit “buy ES” or “buy NQ” before brushing your teeth. We had the usual pattern this morning: futures with a modest move (higher today) when many US-based traders were waking up followed by a lift into the official open. After a three-day selloff, which was very out of character for the recent market environment, we saw a Tesla-led rally yesterday and a resumption of the “animal spirits” for the past two mornings. Today those market-based “animal spirits” were boosted by data from the University of Michigan, when it reported that Consumer Sentiment rose to a four-month high, and 1-Year inflationary expectations dipped to 2.7%.
As I type this around midday, some of the enthusiasm has ebbed. The S&P 500 (SPX) was up nearly 1% at its high, but it has given back about half its gains. Tech stocks are performing better, with all the Mag 7 stocks and most semiconductor stocks trading higher. There were headlines that the Nasdaq Composite Index (COMP) hit an all-time high. That said, the much more widely traded Nasdaq 100 (NDX) hasn’t yet topped its July 10 high, though it is just about 1% shy. Part of that is the ongoing push-pull between stocks and bonds. Treasury yields were a few basis points lower before the 10am EDT release but have now slipped back to roughly unchanged levels.
While it is certainly good news that inflationary expectations are cooling, we’ve noted before that the Michigan 1-Year Expectations seem highly dependent upon prices at the pump. For almost all of this year they have moved in virtual lockstep:
University of Michigan 1-Year Inflation Expectations (yellow) vs. AAA National Average Gasoline Prices (green), since December 2016
Source: Bloomberg
Past performance is not indicative of future results
It would be pointless to be dismissive of a welcome economic development, but considering that it appears to be dependent upon an input that economists routinely leave out of their inflation analysis – they’re always focused on “Core” data, which excludes volatile food and energy prices, it’s understandable why the early enthusiasm for the Michigan readings faded. If bonds don’t like them, then stocks won’t like them as much either.
But there is no disputing the sentiment in the market’s most important sector – big tech. TSLA is a bit of an outlier when we examine its business relative to many of its other major peers – its main business involves manufacturing something other than semiconductors, even as they are trying to be a major AI leader – but its role in the market’s mindshare remains important. The TSLA earnings response seemed to rekindle enthusiasm for all things big tech. Thus, the rotation trade can wait a day. It’s once again about big tech, at least for now.
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