Markets are like life, full of twists and turns

Wednesday’s US inflation data provided the upward surprise that had been partly anticipated by the market. Even though the headline year on year figure of 2.1% was not far away from analysts estimates, the month on month gain of 0.3% implies an annual rate of closer to 3%. The bond market sold off, but only modestly, yields are creeping higher but as yet have failed to hit the 3% mark. Equity prices rose sharply, and this is pure speculation, but one’s experience of trading floors would lead one to conclude traders anticipated a higher number, then expected the equity market to follow the bond market and went short into the data. When the expected news arrives, and traders look to cover, there is a lack of sellers and the market spikes. The S&P 500 is now back over 2700 having been close to 2500 a week ago and the Vix index is trading back below its long-term average of 20.

Are we out of the woods now? A certain degree of calm has returned. What is worth noting is the continued-out performance of higher beta sectors such as materials. During periods of market corrections, the bank's sector tends to underperform, not this time. Those sectors which are associated with a lower beta, for example, utilities and tobacco remain very unloved.

Many investors were in a state of complacency, then moved into panic mode and are possibly heading back to complacency. February is a notoriously difficult month for stocks and shares, not sure why that should be, possibly the weather. There are three months that apparently historically offer negative returns, February, May and September. This would suggest they are the best buying months, not the months to be selling.

Investors are now absorbed with moves in the bond market, and what does rising 10-year yields do for equity prices? One strategist report recently reminded us that back in the 1950’s 10-year yields went from 2% to 4.5% and equity prices performed. Aside from the inflation data Wednesday’s retail sales and Thursday’s Industrial production data came in slightly below expectations. The argument could be put forward that, should bond prices start to rise, yields fall that this could be equally as damaging for equity prices as much as another sharp rise. Falling yields from here could suggest that the bond market was getting concerned economic growth was weakening. What investors like is stability, like the porridge, not too warm and not too cold.

Posted on February 15, 2018 .