Markets Rally on Tame Inflation Data

In an extremely volatile week, the Dow (+4.2%), NASDAQ (+8.1%) and S&P 500 (+5.9%) ended the week with very strong gains.  Meanwhile, taxable, and tax-free municipal bonds were up almost a remarkable 2% for the week.  

The elections were not the main driver of the market rally last week.  In fact, while the markets were up slightly on election day, they were down over 1% the following day because investors were disappointed that the outcome remained uncertain.  However, the real rally came on Thursday with the release of the key inflation numbers for October.  The Consumer Price Index (CPI) came in at 7.7%, lower than the 8.2% reported the prior month, and slightly less than economists expected.  After that data release, the markets rocketed the highest since March 2020, as the Dow and NASDAQ jumped an amazing 3.7% and 7.4%, respectively, and continued their rally into Friday.

While nice to see, we aren’t buyers of the magnitude of that market rally after the release of the CPI data.  Our opinion, which is also shared with our CFA consulting team, is that the market move was an over-reaction to the inflation data.  Even Fed officials came out and tried to tamp down expectations that the Fed would slow down their interest rate hikes.  After all, 7.7% inflation is still very high, and one data point does not constitute a trend.  Does anyone remember the one-month drop in inflation this past April?  That was met with sharp losses when the inflation numbers came out higher the following month again.  In short, we caution folks not to be too exuberant yet.  Just enjoy the rally for what it was.

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