Inflation Continues To Ease

Key Takeaways

• S&P 500 Hits Its 42nd High, Signaling Broad Market Strength With 80% Stocks Above Moving Averages
• China’s Stimulus Boosts Stocks, But Concerns Linger About Long-Term Effectiveness Of Government Intervention
• PCE Data Suggests Controlled Inflation, Possibly Giving The Fed Room For Future Interest Rate Cuts

Stocks closed higher on Thursday as the S&P 500 set yet another new high, making the total count 42. The S&P 500 closed higher by 0.4%. The Nasdaq Composite added 0.6% while the Russell 2000 and Dow Jones Industrial Average added 0.5 and 0.6%, respectively. We’ll see if markets can hit their 43rd new high of year following this morning’s Personal Consumption Expenditures (PCE) report.

Ahead of this morning’s PCE report, forecasts called for core PCE to be up 0.2% month-over-month and 2.7% year-over-year. While the annual number came in as expected, the monthly number was just 0.1%. This would seemingly suggest inflation is well under control, giving the Fed room with respect to lowering interest rates. Prior to the PCE report, the CME Fed Watch Tool was evenly split on a rate cut of 25 or 50 basis points in November. Following the economic news, those odds were unchanged.

Some individual stock performances from Thursday worth noting include Coinbase. Shares of Coinbase jumped 7% on Thursday. That company’s stock is very closely correlated with bitcoin which has been flirting with $65 thousand after falling to just above $45 thousand back in August. Micron shares soared nearly 15% Thursday after the chip maker reported strong earnings. Shares of Super Micro Computer fell 12% after it was learned the server maker is being investigated for accounting fraud.

Also, Chinese stocks had another strong outing. The iShares China Large-Cap ETF gained 8% as additional stimulus measures were announced by China. This time, it was a lowering of bank reserve requirements to encourage greater lending that boosted stocks. Chinese stocks are up nearly 16% this week following massive stimulus plans. This has the feeling of the government throwing everything, including the kitchen sink, at the economy. While the impact has been positive for stocks thus far, I think it’s worth questioning what else the government can do if these measures fall short.

Among the stocks I’m watching today is Costco. The company beat on revenues: however, same store sales were soft, and that stock is trading lower by 1.4% in premarket. DirectTV is in talks to buy Dish. Dish is owned by EchoStar, while DirectTV is owned by AT&T. Both companies have seen their subscriber numbers fall, losing customers to competitors such as Google’s YouTube TV. A merger could open opportunities for more competitive pricing and would also include Dish’s Sling TV service.

Another potentially major story that hasn’t been getting much coverage is a looming strike at ports stretching from Maine to Texas. The current contract under which laborers are working is set to expire Monday. If a new contract isn’t reached by then, around 45 thousand workers could strike. The financial impact of a strike is estimated to cost the U.S. economy $5 billion per day according to an analyst at JPMorgan. Automakers could be among the industries particularly hard hit.

One other item of interest that I’m watching is market volatility. The VIX is sitting just below 16 at the moment. With the market making new highs, you might expect volatility to be much lower. But I think what you see happening is a lot of demand for protection in the form of option put buying. When that type of demand is prevalent, it often tends to be a contrarian indicator and bullish for stocks. It’s when the demand subsides, and investors are less fearful that stocks may fall.

Following this week’s PCE data, next week will be a big week of economic data with the latest employment figures scheduled for release next Friday. Then, two weeks from today, earnings season will kick off and we’ll hear from, among others, JPMorgan. Therefore, we are heading into a period of heavy economic data and earnings news. I’ll have more on both of those next week, but for now, it may be a good time to take inventory of existing positions and how you want to be positioned.

For today, I want to see how the market digests the PCE data. As I’ve mentioned, we have set 42 record highs in the S&P 500 this year and the recent strength has come despite the fact that market darling Nvidia is relatively unchanged for the quarter. In fact, as of Thursday’s close 80% of the stocks in the S&P 500 are trading above their 50-day moving average and nearly the same number are trading above their 200-day moving average, suggesting the rally is quite broad-based. Let’s see if we can continue moving higher with broad market participation. As always, I would stick with your investing plan and long-term objectives.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.