Markets Down on Inflation News

Stocks opened a bit lower this morning, following on yesterday’s modest decline. At the moment, the Dow is down 55 points and the S&P 500 is down .2%. The big story today is rising inflation (see below), which is pushing bond yields higher (and prices lower). Interestingly, the dollar also strengthened, which may signal that traders are betting inflation will be accompanied by economic growth (that is, no stagflation). The iShares 20+ Year Treasury Bond ETF (TLT) is down 1% and the iBoxx Investment Grade Corporate Bond ETF (LQD) is down .6%.

The Consumer Price Index (CPI), which measures retail inflation, accelerated to 6.2% in October from year-ago levels. That’s the fastest rate of price growth in more than 30 years. Of course, oil’s price spike is responsible for a good portion of that, but even stripping out typically volatile food & energy categories so-called “Core CPI” accelerated to 4.6%. The Federal Reserve’s long-run target is closer to 2%. Covid’s hangover of manufacturing/shipping/trucking disruptions is clearly responsible for some of that gap. But some is also a byproduct of accelerating economic growth. For example, prices are increasing for stuff like medical care and rent that have nothing to do with supply chain problems. Bloomberg Economics believes CPI could hit 6.8% in November and might not peak until January.

Yesterday I mentioned that it’s hard to interpret what signals the bond market is sending. Excluding today’s session, bond yields have been falling since the third week in October. Lower yields tend to signal lower inflation & growth. But even before today’s report we knew that inflation was pretty high, and certainly should result in higher bond yields. On his show Mad Money, Jim Cramer speculated about why we haven’t seen a convincing trend higher in yields. First, huge foreign demand for our Treasury securities is keeping a lid on yields. And he says inflation overseas is worse than it is here. Next, he wonders if maybe the bond market is suggesting that high inflation is transitory. And as I’ve said repeatedly, the Fed’s massive bond-buying program is aimed at keeping rates low. But really, who knows? He says sometimes “It’s impossible to make sense of this market.” Let things play out. Maybe today’s inflation report will be the catalyst for higher yields.

Not every development or event demands a big stake in the ground for investors. In fact sometimes the closer one focuses on a short period of time or trend, the more confused one gets. Josh Brown, CEO of Ritholtz Wealth Management, urges investors to step back and take a broad view. “Big picture, it’s very, very hard to be bearish. The only reason why you would be bearish is because things look too good, and people are acting a little bit too aggressively. I suppose there’s some legitimacy there, but I don’t know another reason for you to look at what’s going on a say, ‘this is not good.’ It’s good.”