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Markets Are Overdoing It a Bit

·3 min read

Wow — what a great day for stock traders… if you’re shorting the market! While it was clear today’s Consumer Price Index (CPI) report was going to be a trigger a week ahead of the next Federal Open Market Committee (FOMC) meeting )when the next interest rate hike occurs), the negative reaction to rising CPI month over month is something else completely.

The Dow closed down -1276 points, or -3.94%, the S&P 500 shot back through 4000, -4.32% on the day, and the tech-heavy Nasdaq dumped -632 points, losing -5.16% in the session. The small-cap Russell 2000 was down a relatively benign -3.91%.

The last time we had a worse single trading session than this was back on June 11, 2020, when it became clear Covid was going to be with us for an extended period of time, prior to vaccines or antivirals and with half the country believing the pandemic was a hoax. Is year-over-year CPI ticking down from +8.5% to +8.3% is the same ballpark as this? It is not. Consider this taper tantrum an overreaction to disappointing — but not earth-shaking — news, and measure some valuations of recession-proof companies now selling at fire-sale prices.

That said, it ought to behoove everyone to keep abreast of what this sticky inflation — and the coming talons of a hawkish Fed gripping interest rates for longer — means going forward, and just wantonly throwing money at a Homebuilders Index XHB hemorrhaging nearly -6% today while 30-year mortgage rates hit new 14-year highs is probably not a great strategy. Homebuilder Lennar LEN got crushed to the tune of -8% on the day, -33% year to date.

Should the longer-term view of the war on inflation affect enterprise-based tech spending, not to mention Bitcoin (down -10% today), this would be a reason to steer clear for now of even terrific, innovative companies like NVIDIA NVDA, which has plummeted -9.5% today, -56% year to date. The innovator of GPUs is now -65% in market cap from its all-time highs. NVIDIA still has a bright future, but it’s pretty dim from the current vantage point.

Bottom line: the Fed is going to raise interest rates 75 basis points (bps) next week. It was likely going to do this even if headline CPI had come in 100 bps lower than it did this morning. As we mentioned in this column this morning, August CPI may not have reflected all the inflation rollover being activated by what’s about to be a 3.00% hike in rates since early March, which is the main reason a 75 bps hike is still more likely today than 100 bps (though be on the lookout for any “leaked” stories to the contrary in the Wall Street Journal here in the Fed’s “blackout period”). But even if the Fed goes more hawkish and vows to keep the heat on, today’s selloff was a bit much.

Market index gains going back to late August are now kaput. Look at it as a valuation re-set. And while there’s still a chance we re-test the intraday lows at the beginning of last week, mid-June lows are still a ways off. And from here, it’s likely the majority of the purge was taken care of today.

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