Daily Market Notes: 5-13-2021

Every day this week has gotten worse as the market basically collapsed yesterday following a terrible April C.P.I. report that ignited inflation worries and fear that the Fed will have to act sooner rather than later.

The major indices never had a chance as they began sharply lower and continued weak and then ended with the usual very late collapse until the Dow finished with a 681 point downside disaster at 33,587. Ditto for the S&P which did even worse with a horrible 89 point shellacking down to 4013. The Nasdaq took a 357 point additional hit to 13,031 while the Russell 2000 Index of small stocks ended 71 points lower at 2135.

It was the worst one-day showing for the Dow since January 29th and the worst for the S&P since February 25th with these two indices around 4% off from last Friday’s record highs while the Nasdaq has done even worse with an 8% drop off of its best earlier in the year best levels and was its poorest showing in three months.

The Dow was hurt by declines in those stocks that had been considered “safe” and had been holding up until this week such as BA, HD, MCD, MSFT and UNH as the energy stocks were the only ones that showed nominal gains such as CVX due to the continued rise of crude oil due to the gasoline shortages that have now emerged in parts of the southeastern U.S. because of  the Colonial Pipeline hacking disaster.

These huge declines have put the indices on track for their worst week in more than six months as the selling came as investors reacted to a surprisingly big jump in inflation last month that stoked concerns that the economy may bounce back too fast from its pandemic-induced doldrums.

Bond yields rose sharply after the April C.P.I. rose by 0.8%, the largest such gain since 2008 and the year over year advance has now reached 4.2% from 2.6% the prior month while the core rate excluding food and energy was higher by 0.9% to a year over year jump to 3% from 1.6% for the largest gain in 26 years.

The advance for the 10-year Note was up to 1.69% from 1.62% a day earlier, a big move. These yields rise when investors fear that an increase in inflation will erode the future value of the income that bonds pay.

Investors have been worrying that inflation could return after being absent for many years as the economy comes out of the recession brought on by the pandemic. Federal Reserve officials and other economists have said moderate inflation may actually be a good thing in a recovery.

Concerns about rising inflation also raise the question of whether the Federal Reserve will change its posture on maintaining low interest rates as the economy recovers. The position of the central banks is that any rate increase should not happen soon given that the economy, and particularly the job market, are still a long way from being fully recovered, as illustrated by last week’s anemic employment report.

Consumer prices could continue to increase as the economy recovers, but higher prices could run the risk of curtailing some spending, which the economy needs to sustain its recovery. The price of new cars, for instance, rose by 0.5% in April, the largest increase since last July, because of heavy demand and a computer chip shortage that has slowed production and reduced dealer supplies.

Rising inflation makes stocks seem more expensive, particularly high-value tech stocks that trade on the potential for their future profits in coming years, which is why such former darlings as AAPL, MSFT and AMZN all fell by more than 2%.

TSLA dropped by 4%, bringing its pullback so far this month to nearly 17%. That has the electric car maker’s stock on pace for its worst month since the pandemic plunge of March 2020, when it lost 22%. .

Gold, which had been doing well lately, sold off down to $1,817 an ounce on the rise in interest rates, which is always negative for the precious metal.

This week sees more earnings as the reporting season for the first-quarter starts to wind down and the lineup is as follows, among others: yesterday –  FUBO, TM higher and EA, LMND lower; today – SONO, VRM, YETI higher and POSH, BABA lower; tonight – ABNB, DASH,  COIN, BLNK and Dow component DIS; Friday – HMC.

Economic reports will have: yesterday – April C.P.I. and see above for details; today April P.P.I. also rose by more than expected at 0.6%, surprise, surprise and the core rate excluding food and energy was higher by 0.7%. The year over year gains are now 6.2% and 4.6% respectively,   weekly jobless claims were down to 473,00; Friday – April retail sales, April industrial production and capacity utilization, mid-month May U. of Michigan Consumer Sentiment Survey.

Donald M. Selkin

Chief Market Strategist

 

Disclosures:

Don Selkin is the Chief Market Strategist at Newbridge Securities Corporation, member FINRA/SIPC and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our current or potential customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analysis concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, and Associated Press}. It is possible that at any given point in time, the author, Newbridge Securities, or one or more of its employees or registered individuals associated with Newbridge Securities, may hold a position, either long, or short, as well as options, bonds or other instruments in the companies mentioned in this report.