Inflation Reports and the Market's Reactions

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Inflation is back in the headlines and investor reactions are still being processed. The Consumer Price Index had its highest year-over-year jump in October, breaking above previous highs to a 6.2% Y0Y increase. The CPI has not reached this level of increase since 1990. (see chart)

On the manufacturing side, the Producer’s Price Index, also reached a peak YoY increase of 8.6%, the same increase as September, but lower than expectations. The PPI is much more volatile as it is more closely tied to commodities so we can expect bigger swings than the CPI. It indicates that consumers will likely see higher prices for some months to come as the manufacturing industry faces higher costs in almost every category.

After the surprising CPI report the 10-year Treasury Note yield broke back above 1.5% and looks to be stabilizing around that level (the bond market was closed for Veteran’s day). The equity markets retraced most of the weekly losses and look to be heading back towards their previous highs. One standout for the week was the faster recovery in smaller companies. Smaller companies within the S&P 500 performed better than the mega caps last week, breaking a month-long trend. Also, the S&P Small Cap Index continued its lead over large caps indices. So, while investors were briefly shaken by the inflation reports, they weren’t discouraged from owning the riskier and cheaper US equity classes. Sentiment is still powerfully positive when it comes to US stocks.    

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