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Understanding the Impact of the Consumer Price Index Report on the Stock Market
The Market Swoon and the Consumer Price Index
The recent release of the consumer price index (CPI) report suggests a potential soft landing for the economy. This positive outlook, however, has yet to reverse the recent downturn in the stock market. A common Wall Street adage suggests that in market corrections, the first 5% loss takes longer due to investors buying the dip. However, the subsequent 5% loss occurs much quicker. This pattern is evident in the S&P 500's performance, which has seen a decline in six of the last seven trading sessions. Despite this, it remains only 3% off its recent highs.
The Perception of Market Performance
Despite the relatively small dip, the market's performance may feel worse than it is. This could be attributed to repeated attempts by investors to buy the dips, which have so far been unsuccessful. Chris Murphy, co-head of derivative strategy at Susquehanna International Group, assures there is no panic. Instead, he observes a trend of investors eager to buy a 5-10% dip. Despite these efforts, the short-term trend remains downward, characterized by a pattern of lower lows and lower highs.
Market Trends and Tech Trade
On the surface, there doesn't appear to be a significant issue. The volume is seasonally light, and volatility is muted. The macro data, including the recent CPI, has been supportive of a soft landing. However, there is growing concern in the tech sector. The Nasdaq 100 ETF (QQQ), Nvidia, and Microsoft have all fallen below their 50-day moving averages. Eric Johnston, head of equity derivatives and cross asset at Cantor Fitzgerald, suggests a reality check is happening following significant run-ups earlier in the year.
The Impact of Rising Yields
The tech sector's weakness has been balanced by strength in healthcare, energy, and pharmaceuticals. However, the rising yields present a significant risk. Higher yields validate economic recovery but can be challenging for tech stocks. A pullback in tech is understandable given the hype around AI. However, the shift towards bullish sentiment and the lack of compelling options in the market at these prices present challenges.
Investor Behavior and Market Competition
According to Anthony Denier, CEO of retail trading firm Webull, there is a significant amount of retail cash on the sidelines. Investors seem content earning 5% yields on their 1-year Treasuries, regardless of the market rally. The $6.7 trillion in money market funds poses serious competition for stocks.
Future Market Trends
While the stock market's weakness is notable, Mark Newton at Fundstrat believes the trends have not worsened enough to extend throughout August. He suspects a market low is imminent, but evidence is needed to confirm this. As the market continues to fluctuate, it remains crucial for investors to stay informed and make strategic decisions based on current market trends and economic indicators.
Hot Take: Implications of CPI and Market Trends for New Businesses
The recent CPI report and market trends present both challenges and opportunities for new businesses. While the potential soft landing suggested by the CPI report is encouraging, the ongoing market swoon and the downward short-term trend can be concerning.
Challenges in the Tech Sector
Particularly for businesses in the tech sector, the reality check following significant run-ups earlier in the year, coupled with the impact of rising yields, could pose significant challenges. The pullback in tech, driven by the AI hype, could impact new businesses banking on AI for growth.
Investor Behavior and Market Competition
Moreover, the shift towards bullish sentiment and the significant amount of retail cash on the sidelines could make it challenging for new businesses to attract investment. The competition from money market funds, offering attractive yields, could further compound this challenge.
Adapting to Future Market Trends
Despite these challenges, the market's weakness is not expected to extend throughout August. This suggests that a market low could be imminent, offering a potential opportunity for new businesses to attract investment. However, it remains crucial for these businesses to stay informed, adapt to market trends, and make strategic decisions accordingly.
Article First Published at: https://www.cnbc.com/2023/08/10/inflation-data-backs-a-soft-landing-but-it-might-not-be-enough-to-stop-the-markets-swoon.html
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