A Closer Look at Stocks

Last week I suggested that we should try to take advantage of the next swing higher in stocks.  I was very constructive on the market despite my reservations about many of the underlying fundamentals.  Since my last write-up, stocks have in fact rallied, but it has been more of a grind higher than a strong, impulsive move.  In certain ways, however, the recent rally has been remarkable as market participants had to shrug off a stream of disconcerting, disappointing economic data.  First, the CPI figures came in much worse than expected as consumer prices rose 0.5% from December  — the fastest pace since August 2023 — resulting in an annual inflation rate of 3% for the 12 months that ended in January.  Then, the PPI data came in worse than expected as the December PPI was revised up to .5% from .2%, with producer prices climbing 3.5% year-on-year.  On Friday, the retail sales data showed a slump in January that was the largest in nearly two years, indicating an abrupt pullback by consumers after a spending spree in the closing months of 2024.  At the same time, Trump continued to blast out threats of widespread tariffs against the trading partners of the US.  Even Jerome Powell brought some bad news when he finally stopped pretending that the Fed had vanquished inflation once and for all and made it clear that the Fed is on hold indefinitely.  We are not going to reach his 2% target any time soon.

The fact that stocks rallied despite this stream of negative news is amazing.  The chart below illustrates how investors kept shrugging off bad news with short-lived price dips followed by subsequent rallies.