What Happened:  Consumer Price Index (CPI) reported higher than anticipated.

What Does it Mean?

On the surface, this data indicates higher inflation and may result in a tougher Fed interest rate policy. Rates moved higher on the news, and stocks fell in response to the report.

Why Do we Care?

In our opinion, markets continue to be held hostage by inflationary data and how this data may influence Fed policy. That said, stocks have been on a tremendous run since last October and are in desperate need of a pullback.

There’s an old saying that “stocks take the stairs up and the elevator down.” This was certainly evident when the Dow dropped over 500 points on Tuesday, at one point being down over 700. Ironically, just as you may have thought the bull move was over, stocks rebounded on Wednesday and Thursday, erasing Tuesday’s loss.

In our opinion, stocks are overdue for a sustained pullback. This is a natural progression during a positive market as short-term traders take profits and longer-term investors step in. We started off the year discussing one of our key themes being increased volatility, and we still believe this to be true. When this volatility comes, we will remain patient and unemotional. For those still sitting on the sidelines, it may be their opportunity to reallocate.

Despite persistent headline inflationary data, our view continues to be that the sustained decline in inflation we’ve seen will ultimately result in a more accommodating Fed policy, thus favoring areas that may be more interest rate sensitive than others.

St. Louis Fed: February 16, 2024

 

Despite the fits and starts we may see in the interest rate and bond market, we feel there remains opportunity in the most interest rate-sensitive areas, such as small-capitalized companies, industrials, as well as emerging markets and other international areas.

While all eyes seem to be focused on the meteoric rise of the big-cap tech names, we are enjoying this move while at the same time positioning ourselves in areas we feel present more value going forward.

It’s always good to revisit previous opinions, so please take a moment to review our 4 Themes for 2024 we sent out to begin the year.

Until next time

 

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