Not Buying in Stores, But in Markets

When good news is good news AND bad news is good news, that’s the sign that momentum rules.  This morning we got a bit of both simultaneously and markets love it.

On the good news front, CPI was indeed modestly market friendly.  The headline reading on a month-over-month basis rose 0.3%, better than the 0.4% consensus.  The core reading was as expected at 0.3%.  Both were below last month’s 0.4% readings.  No matter how we annualize them, both remain above the Fed’s 2% inflation target, but the move is a step in the correct direction.

Retail sales, however, stunk.  The headline number came in flat, well below the 0.4% rise that was expected.  The Control Group also fell well short, with a decline of -0.3% when a rise of 0.1% was expected.  People seem to be keeping their wallets firmly in their pockets, which fits with some of the prior data and the commentary that we heard from a wide range of consumer-facing companies.  (We’ll learn quite a bit more tomorrow when Walmart (WMT) reports earnings.)

These numbers are clearly bond-market friendly.  Tamer inflation and a tepid economy are catnip to a bond investor, and rates reacted accordingly.  We see yields down by 6-9 basis points throughout the curve, an understandable reaction. 

Stocks took the lower yields as a good sign.  Lower yields should of course help stock prices, and they are today.  But consider the counterfactual.  If retail sales had been above consensus, we could easily foresee stock traders celebrating the strong economy while overlooking the bond market.  Heads I win, tails I win.  That’s a hallmark of a momentum-driven, risk-on market.

We’ve seen signs that risk is firmly on.  Low quality stocks, of which meme stocks are the extreme example, don’t rally in risk-off markets.  We wrote about the return of that phenomenon over the past two days.  And while we noted that “the half-life of these flourishes seems to be shrinking”, today’s pullback in GameStop (GME), AMC, and others hardly means that traders’ risk appetites have changed.  We wouldn’t see bitcoin rise by more than 5% if people suddenly became more risk averse.  The Russell 2000 (RTY) wouldn’t be the best performing major index if people suddenly became more risk averse – even if it is disproportionately helped by 10% rallies in its two largest components, Super Micro Computer (SMCI) and MicroStrategy (MSTR).  Both are highly speculative and volatile, so investors should enjoy it while they remain in the index.[i]

Some are saying that this month’s strength invalidates the notion of “sell in May.”  Yet we really can’t assert that the vague seasonal guidance is truly wrong.  While this is a very difficult tape to fight, we won’t know for some time whether this proved to be a time to chase a rising market or instead to sell into strength.  There are plenty of measures that suggest that equities are far closer to being overvalued rather than cheap.  But for now, most are loath to fight the tape.

—

[i] Both are likely to leave RTY next month.  It is incredibly odd to have SMCI in both the S&P 500 (SPX) and RTY simultaneously.