Stocks Soared After A Better Than Expected Inflation Report Image: Bigstock Stocks soared yesterday, notching their biggest one day gain since 2020. The Dow was up 3.70%. The S&P was up 5.54%. The Nasdaq was up a whopping 7.35%. And the small-cap Russell 2000 was up 6.11%. A better than expected Consumer Price Index (CPI) report sent stocks soaring. The market was expecting a 0.7% m/m increase in the headline rate and got 0.4% instead. On a y/y basis, it came in at 7.7%, down from last month's 8.2% and views for 8.0%. The core rate (ex-food & energy), was up 0.3% m/m vs. the consensus for 0.5%. And on a y/y basis, it was up 6.3% vs. last month's 6.6% and views for the same. Inflation is still too high. But the decline is giving hope that we may indeed have already seen peak inflation. Don't expect the Fed to stop raising rates anytime soon. At least not at December's meeting, or February's meeting. But after this report, it's looking more and more likely that the Fed slows their pace to 50 basis points their next time out, rather than 75 bps (like their last 4 meetings in a row). And if inflation can keep falling, their terminal rate may not need to climb to 5% after all, and hover nearer their 4.6% target they forecast back in September. Either way, the report was interpreted favorably. Stocks rallied sharply, while treasury yields and mortgage rates fell sharply. Great day. The midterm uncertainty is still out there as it's still too early to call which party will officially control the majority in which chamber of Congress. But, it's looking more and more likely that the lower house may change majorities, which would ensure gridlock. This is not a judgement on one party or another, but an acknowledgement that the market does well during periods of gridlock. And that would be a welcomed development at the moment. That's also illustrated by the Presidential Cycle which shows stocks typically make big gains after midterms (which typically results in one party controlling the White House while the other party controls one or both chambers of Congress). The 4-year Presidential Cycle shows that Q4 of year 2 (midterm year), is the second strongest quarter of all 16 quarters, with Q1 of year 3, being the strongest quarter. Moreover, year 3 (that's 2023), of the 4-year Presidential Cycle is the best year of all 4 years. So we are literally at the beginning of one of the best times for stocks. In fact, since 1950, stocks have always gone up in the year after midterms. And the average 12-month forward returns are 18.6%. So there's plenty of reason to get excited about the market right now. Today we'll get another look at the economy with the Consumer Sentiment report. And, of course, we'll get more earnings with another 231 companies on deck to report today. (And next week, we'll get another 601 set to report.) In the meantime, Q4 has so far lived up to its reputation as being the best quarter for stocks. And the midterm effect is off to a great start. Best, Kevin Matras Executive Vice President, Zacks Investment Research |
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