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Inflation and J.C. Penney — What you need to know in markets on Friday

Myles Udland
Markets Reporter

To cap a week that has seen volatility return to markets, investors will contend with a fairly small offering of economic and corporate news.

The only big economic news of the day is expected to be the monthly report on inflation, with July’s consumer price index set to cross the tape at 8:30 a.m. ET. Expectations are for “core” inflation, which backs out the more volatile cost of food and gas, to rise 1.7% over the prior year. The Fed is targeting 2% inflation.

On the earnings calendar, the lone highlight should be retailer J.C. Penney (JCP), which is expected to report results before the market open. This report will follow a day that saw Macy’s (M) fall 10% after its outlook disappointed while Nordstrom (JWN) topped estimates and was up about 2% in after hours trading.

The main focus, however, will remain on the broader market, which on Thursday saw the S&P 500 fall more than 1% for the first time in 58 trading days, one of the longer streaks we’d seen in the last 50 years.

When all was said and done the major averages closed at their lows of the session with the Dow losing 204 points, or 0.9%, the S&P 500 falling 35 points, or 1.4%, and the tech-heavy Nasdaq falling 135 points, or 2.1%.

Screens were seeing a lot of charts moving down and to the right on Thursday.

And whether it’s investors concerned over President Trump’s comments on North Korea or simply a summer swoon after a particularly placid period in markets, at least this week it is clear that we’re seeing something happen in markets after a couple months of nothing going on.

Stocks usually go up

There is a truism we like to say at Yahoo Finance which is that stocks usually go up.

On Thursday, of course, stocks did not.

In fact, the S&P 500 had its second-worst day of the year and by falling more than 1% broke a 58-day streak both of not losing more than 1% in a given day and also not going up or down by that much in a single session.

So in a note published on Thursday, the team over at Bespoke Investment Group took a look at what happens after these streaks (this was the 20th-longest such stretch for the market in the last 50 years) are inevitably broken.

The answer is perhaps predictable — stocks usually go up.

Bespoke specifically looked at the three active streaks we had in markets coming into Thursday — 58 days of no 1% up or down moves, 58 days of no 1% down moves, and the still-intact 76 days of no 1% up moves.

The firm found that when a 50+ trading streak of no 1% moves is broken by a 1% down day, stocks tend to bounce back over the next one- and three-month period. In the month following this streak’s snapping with a loss, the S&P 500 gains 0.87%, on average. Over the next three months, average returns are 1.15%.

When streaks without a 1% end with a down day like they did on Thursday, returns are usually pretty strong in the coming weeks and months. (Source: Bespoke Investment Group)

Going forward, then, the average outcome investors can expect is a small rise in the stock market. Whether this comes to pass or not is anybody’s guess, and as the adage goes, past performance does not indicate future returns.

But this is instructive data to keep in mind, as during stretches like what we just saw snapped on Thursday, it sometimes starts to feel like stocks might never go down again. Of course the logic of markets says that this complacency is itself something worry about, and as we noted on Wednesday the job of a professional investor is sort of also the job of a professional worrier.

And while no one seriously thinks that stocks won’t fall again, the first time they do is a bit jarring if for no other reason than because the bear case for the market always seems more forceful than the bull case. This one day of losses, then, can almost seem to prove that the bears have been right all along.

But in markets as in life, no one has an absolute claim on correctness.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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