Market Commentary

For the week ending 2/16/2024

An unexpected rise in inflation figures brought volatility to the stock market last week.  The S&P 500 recorded its first weekly decline since the start of the year, with the Dow Jones and NASDAQ also sustaining minor losses.  But the volatility was most exemplified by the small-cap Russell 2000 index, which suffered its biggest daily drop since last June on Tuesday but rebounded in subsequent days to finish the week with a positive print.

Investors digested several upside inflation surprises during the week, the most consequential of which was the Consumer Prices Index.  In January, prices rose 0.3%, higher than the three previous months and above forecasts.  More concerning still was the 0.4% rise in core consumer prices, (core prices exclude food and energy, which fluctuate more rapidly than others.)  The annual core CPI inflation rate unexpectedly held at 3.9%, above forecasts of 3.7%. Interestingly, core goods prices actually fell 0.3% for the month, which was the biggest drop since July.  But core services prices, which includes the cost of rent and housing, rose 0.7%, more than offsetting the drop in prices for goods.

Then on Friday, the Labor Department reported that Producer Prices had increased 0.3% in January as well, the most in five months, and core prices rose 0.5%, well above expectations of around 0.1%.  A 2.2% jump in the cost of hospital outpatient care appeared partly to blame.

The other major economic release of the week, retail sales, was also disappointing, although signs of weaker growth could help calm inflation concerns.  Sales at the retail level, which had been rising steadily for the past year, plummeted 0.8% in January. While many economists sought to blame harsh winter weather in January as a reason for the weakness, typically weather-sensitive sales at restaurants and bars rose 0.7%, squashing that narrative.

Although the CPI and PPI data were certainly unwelcome, we hasten to point out that it was just one month in an otherwise favorable trend, and that the unexpected rise in core inflation was skewed toward just one factor, shelter costs.  Investors on Wall Street seem to share that view as a large portion of them rushed in to “buy the dip” that sellers left in their wake on Tuesday.

More concerning overall might be the drop in retail sales in January.  Here too, we have just a one-month setback amid an otherwise positive trend.  But the size of the drop was certainly noteworthy, and it has focused our attention as we await further data to determine if it was just an outlier, or the harbinger of something more serious.

For the week, the Dow Jones fell 44 points to 38,628 (-0.1%), the NASDAQ was down 215 points to 15,776 (-1.3%); and the S&P 500 shed 21 points to 5,006 (-0.4%)

Oil rose $2.00 to $79.00/bbl.       Gold dropped $15 to $2,024/oz.

And the yield on the 10 yr. Treasury ticked up 0.1 to 4.3%.

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