When 0.1% Is Enough to Wreck the Rally

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Another inflation date is behind us.

Here’s the short version: Economists got it wrong again, and rate-cut hopefuls took an ice bath.

Against expectations of a 0.2% rise in the Consumer Price Index month-over-month, the report showed an increase of 0.3%.

Prices rose 3.4% over the last year, still well ahead of the Federal Reserve’s 2% target. And the “core” CPI — the index that deliberately doesn’t track energy and food costs — rose in line with expectations at 0.3%.

Digging deeper into the data…

We saw gains in electricity and gasoline — bucking the energy downtrend — as well as housing, home insurance, medical care, auto insurance (which is up over 20% in the last year alone), recreation, new and used vehicles, and airfare.

First of all… huh? Didn’t we slay the inflation dragon when the Fed played its hand a month ago and promised interest rate cuts?

Guess not. Clearly, this fight won’t be so easy. Core CPI is headed in the right direction, with the year-over-year measure — 2.5%, down by more than half from its September 2022 peak.

But 2.5% is still not the Fed’s fabled 2% target… and the slowing of the curve both on the CPI itself and its rate of change (now sitting just a touch under 0, showing molasses-like progress) suggests the last few rounds of this fight will be the longest and toughest. The report made waves in stock and bond markets, but that’s not everything worth watching as we close out the week.

The charts of the dollar… bitcoin… and the Japanese stock market — about to make its first new high in four decades — are on deck.

Let’s check it all out and make some predictions.

❖Stocks sold off on the CPI print…

Dig this knee-jerk reaction to the CPI report in the one-minute chart of S&P 500 futures: Traders sold off the S&P 500 by 0.73% in the span of three minutes after seeing inflation was a point off of expectations. A touchy bunch, aren’t they?

This is likely, at least in part, the work of trading algos programmed to dump S&P 500 futures on any number hotter than expected. Regardless, the selloff unleashed continued volatility in stock prices throughout the day.

Treasurys also sold off the inflation news. The 10-year Treasury yield, one part of the worrying — and worsening — yield curve, surged as much as 2.14% before settling into a higher low. (Remember — Treasury yields and prices move opposite each other.) This all illustrates an important lesson about where the stock market is now compared to just a few years ago.

I’ll bet you never even bothered to check the inflation report in 2019, right? I sure didn’t. Because it was almost always a great pile of nothing… and stocks hardly reacted.

Now, it’s enough to make serious waves. It’s the primary narrative driving stock prices higher and lower.

In short: Expect volatility around every new inflation report going forward. And really, we should come to expect volatility as a solid institution for many more years. The new era of higher interest rates for longer, throwing out the 2010-to-2021 playbook, all but guarantees it.

And there’s more evidence that the first quarter will continue to be challenging: dollar strength.

❖ The greenback broke out…

Check out the latest on the U.S. Dollar Index (DXY) chart, which we first started tracking on Sunday: The buck seems to have escaped the downtrend channel it’s been in since the end of October… and is tacking on gains as we speak.

This is tough news for buy-and-hold investors. As we showed, the dollar and stocks have been inversely correlated over the last few years. A stronger dollar will weigh further on stock prices… making the first quarter tougher still.

Just remember, trying times are buying times. A stretch of underperformance in U.S. stocks is a good opportunity to load up on quality companies. Especially, as Lucas Downey has been pointing out, small cap stocks in the health care and financial sectors.

To follow up, Lucas will share one large-cap health care idea this coming Tuesday…

And make sure you tune in Monday for a small-cap idea from me… along with a way for you to easily find such ideas yourself.

What else is in the news this week…? Oh, right.

❖ Bitcoin ETFs are live and ahead of schedule…

After a snafu on the SEC’s official X (formerly Twitter) account, where… someone… posted a fake announcement that the bitcoin ETFs were approved, the official approval happened on Wednesday.

Eleven bitcoin ETFs are now live and available to buy in your brokerage account. It represents catching an elusive white whale for bitcoin investors for many years.

So far, it looks like the ETFs were indeed a “buy the rumor, buy the news” event. After a brief and mild selloff, bitcoin soared nearly 7% to trade as high as $49,000 in the wake of the listings. As I write, it’s reversed some and is settling around the level it hit right after the announcement. Regular readers already know my stance on bitcoin. I believe we’re in another one of those bull cycles that seem to surprise investors round the world… even though they happen like clockwork every few years.

And with the halving event slated for early May, there’s another bullish catalyst on the horizon for the King of Cryptos.

I bought more bitcoin and select altcoins (every coin that’s not bitcoin) last week — initially thinking I went overboard… but now more than pleased with my decision.

If you want to buy bitcoin, you suddenly have 11 ways to do it easily in your brokerage account. I’ll share some thoughts about which one I think is best in a soon-to-come edition of TradeSmith Daily.

Speaking of assets that haven’t made new highs in a while but are well on their way… how about Japan?

❖ The Land of the Rising Sun is ripping higher…

…to a level not seen since, get this, 1989.

As of now, Japan’s benchmark stock index the Nikkei 225 is about 11% away from a new all-time high. That’s tacking on gains after a banner year in 2023, where the Nikkei 225 rose 30% — beating even the mighty S&P 500.

It seems on track to do something similar this year. Take a look at what it’s done thus far in 2024. Year-to-date, the Nikkei 225 (blue) is up more than 5%. That handily beats the S&P 500 (orange), up 1.5%… and the Vanguard Total International Stock ETF (VXUS; light blue), which I’m watching closely for outperformance this year and which is actually down about a quarter of a percent to kick things off.

This is largely due to speculation that Japan’s central bank will delay plans to end its ultra-loose monetary policy, which it has staunchly maintained since 2016 in a break from other major economic powers that have mostly tightened up credit conditions post-pandemic.

One has to wonder how long this “party like it’s 1989” policy can last. If Japan’s central bank is forced to raise rates, it could have a cascading effect on the country’s stock market.

Until then, though, Japan looks like a bright spot in an otherwise blaring red screen to kick off 2024. It’s one to watch, if not nibble on a bit, as we go through the year — while keeping a close eye on monetary policy.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily