Verum Insights...

Mega caps support index gains

The major equity indices logged gains this week. Upside moves were supported by solid buying in the mega cap space, leading the Vanguard Mega Cap Growth ETF (MGK) to close 2.5% higher. 

The market-cap weighted S&P 500 jumped 1.5% versus a 0.5% gain in the Invesco S&P 500 Equal Weight ETF (RSP).

The outperformance of mega cap shares was also apparent in S&P 500 sector performance. The information technology sector was the top performer by a decent margin, jumping 3.8%, followed by communication services (+2.0%). Both of which contain mega cap constituents. 

Market participants were dealing with a lot of economic data, news about tariffs, and commentary from Fed Chair Powell. 

Fed Chair Powell's semiannual testimony before Congress was this week and didn't feature any big surprises. He again said that there is no hurry to adjust the policy stance, repeating comments made at the conclusion of the January FOMC policy meeting.

On the tariff front, President Trump imposed 25% tariffs on steel and aluminum, which will go into effect on March 12 with Australia potentially receiving an exemption.

Also, President Trump's reciprocal tariff plan was seen as less economically provocative as feared. To wit, the tariffs won't be applied until April 1 at the earliest, and at that time will be applied on a case-by-case basis.

Economic releases were mixed:

• The New York Fed's January Survey of Consumer Expectations showed one-year ahead inflation expectations unchanged at 3.0% (versus Friday's release of the February Univ. of Michigan Consumer Sentiment Index, which showed year-ahead inflation expectations surging from 3.3% to 4.3%).

• Total CPI was up 0.5% month-over-month and 3.0% year-over-year (versus 2.9% in December) while core CPI, which excludes food and energy, was up 0.4% month-over-month and 3.3% year-over-year (versus 3.2% in December), which created more angst about inflation not making it back to the Fed's 2.0% target and the Fed itself not making its way back to cutting rates anytime soon.

• The January PPI report was greeted with some relief on the basis that it should help keep the PCE Price Index (the Fed's preferred inflation gauge) in check after various components in the PPI report, like airfares and physician care, showed month-over-month declines.

• The retail sales report for January was noticeably weak and the industrial production report for January showed growth without any help from manufacturing or mining output (i.e., cold weather drove a spike in the output of utilities, which was cranking to meet demand for heat).

Treasuries settled with modest gains.  The 10-yr yield was one basis point lower than last Friday at 4.48% and the 2-yr yield dropped three basis points this week to 4.26%. 

• Dow Jones Industrial Average: +0.6% for the week / +4.7% YTD

• S&P Midcap 400: -0.3% for the week / +2.5% YTD

• S&P 500: +1.5% for the week / +4.0% YTD

• Russell 2000: UNCH for the week / +2.2% YTD

• Nasdaq Composite: +2.6% for the week / +3.7% YTD

Monday:

The stock market kicked off the week with an upbeat start, bouncing back from Friday's declines in a buy-the-dip trade. The Nasdaq Composite jumped 1.0%, the S&P 500 rose 0.7%, and the Dow Jones Industrial Average closed 0.4% higher. The major indices closed their highs of the day with many stocks participating in index gains.

Mega-cap stocks played a crucial role, leading the upside charge. Earnings reports also fueled buying interest.

There was no US economic data of note on Monday.

Tuesday:

The stock market had a mixed showing with major indices trading above and below prior closing levels. There wasn't a lot of conviction on either side of the tape and the choppy action followed the ebb and flow of mega cap names.

The market was digesting more news about tariffs and was focused on Fed Chair Powell's semiannual testimony before Congress, which began Tuesday in the Senate Banking Committee. Mr. Powell again said that there is no hurry to adjust the policy stance, repeating comments made at the conclusion of the January FOMC policy meeting.

The tariff talk wasn't exactly breaking news with President Trump imposing the previously announced 25% tariffs on steel and aluminum, which will go into effect on March 12 with Australia potentially receiving an exemption.

Tuesday's economic lineup was limited to the NFIB Small Business Optimism survey, which declined to 102.8 from 105.1 in December.

Wednesday:

The stock market closed mixed at the index level, but the vibe under the surface was negative through the entire session. The underlying downside bias followed a hotter-than-expected January Consumer Price Index (CPI) report, which sent Treasury yields sharply higher.

Total CPI was up 3.0% year-over-year, versus 2.9% in December, while core CPI was up 3.3% year-over-year, versus 3.2% in December. The 10-yr note yield, which is most sensitive to changes in inflation, was at 4.53% ahead of the 8:30 ET release before settling at 4.64%. The 2-yr yield settled eight basis points higher at 4.37%.

The S&P 500 closed 0.3% lower and the Dow Jones Industrial Average closed 0.5% lower after recovering off session lows. The Nasdaq Composite settled slightly higher than yesterday, boosted by gains in the mega cap space in a buy-the-dip bid following initial declines.

Reviewing Wednesday's economic data:

• Weekly MBA Mortgage Applications Index 2.3%; Prior 2.2%

• January CPI 0.5% (Briefing.com consensus 0.3%); Prior 0.4%

• January Core CPI 0.4% (Briefing.com consensus 0.3%); Prior 0.2%

Thursday:

The January Consumer Price Index on Wednesday sent some inflation shockwaves through the stock market and Treasury market. Fortunately, there were no aftershocks following Thursday's release of the January Producer Price Index, which wasn't all that pleasing from a headline perspective but still created a sense among market participants that there might not be an inflation shockwave in the PCE Price Index when it is released on February 28.

That sense of things was influenced by month-over-month declines in various components, like airfare and physician care, and it resonated in the Treasury market, which provided clearance for the stock market to continue with Wednesday's buy-the-dip efforts.

The 2-yr note yield fell six basis points to 4.31% and the 10-yr note yield dropped 11 basis points, completing a round-trip to 4.53% where it stood just before yesterday's release of the January Consumer Price Index.

The move in the 10-yr note yield would have effectively stolen today's trading show if not for the S&P 500's assault on its record closing high (6118.71). Ultimately, it came up a whisker shy of a new high, yet there was still ample cause for celebration with all 11 S&P 500 sectors ending the day higher.

Reviewing Thursday's economic data:

• The Producer Price Index for final demand increased 0.4% month-over-month (Briefing.com consensus 0.2%) following an upwardly revised 0.5% increase (from 0.2%) in December. Excluding food and energy, the index for final demand increased 0.3% month-over-month (Briefing.com consensus 0.3%) following an upwardly revised 0.4% increase (from 0.0%) in December. On a year-over-year basis, the index for final demand was up 3.5% (3.51% unrounded) versus 3.5% in December (3.46% unrounded). Excluding food and energy, the index for final demand was up 3.6% (3.61% unrounded) versus 3.7% in December (3.75% unrounded).

  • The key takeaway from the report is that the month-over-month readings were less upsetting than the month-over-month readings seen in the CPI report. Also, the year-over-year readings look improved at first blush, yet the revisions moved the December year-over-year readings for PPI and core PPI higher (versus the initial readings), so the improvement in January is from a higher base, meaning it is relative and not absolute. (Sidenote: when the December PPI report was first released, PPI was up 3.3% year-over-year and core PPI was up 3.5%).

• Initial jobless claims for the week ending February 8 decreased by 7,000 to 213,000 (Briefing.com consensus 217,000) while continuing jobless claims for the week ending February 1 decreased by 36,000 to 1.850 million.

  • The key takeaway from the report is the low level of initial jobless claims, which continue to connote an otherwise positive demand outlook on the part of employers who are reluctant to cut staff.

Friday:

The stock market navigated a mixed landscape Friday. Early optimism gave way to a more subdued tone that led the S&P 500 to close little changed from Thursday, the Nasdaq Composite to log a 0.4% gain, and the Dow Jones Industrial Average to close 0.4% lower.

Stocks lost initial momentum when the S&P 500 neared its all-time high of 6,128, reaching 6,127 at its best level. This price action, along with a batch of economic data that stoked concerns about growth, contributed to the lackluster index showing.

The retail sales report for January was noticeably weak and the industrial production report for January showed growth without any help from manufacturing or mining output (i.e., cold weather drove a spike in the output of utilities, which was cranking to meet demand for heat).

Reviewing Friday's economic data:

• January Retail Sales -0.9% (Briefing.com consensus 0.0%); Prior was revised to 0.7% from 0.4%, January Retail Sales ex-auto -0.4% (Briefing.com consensus 0.3%); Prior was revised to 0.7% from 0.4%

  • The key takeaway from the report is that there was a notable pullback in spending on goods, something that can be attributed in part to abnormal weather. The full picture, however, points to a tired consumer after the holidays, raising the question as to whether that fatigue will persist because of inflation pressures or prove to be short-lived.

• January Export Prices 1.3%; Prior was revised to 0.5% from 0.3%

• January Export Prices ex-ag. 1.5%; Prior was revised to 0.4% from 0.3%

• January Import Prices 0.3%; Prior was revised to 0.2% from 0.1%

• January Import Prices ex-oil 0.1%; Prior 0.1%

• January Industrial Production 0.5% (Briefing.com consensus 0.3%); Prior was revised to 1.0% from 0.9%, January Capacity Utilization 77.8% (Briefing.com consensus 77.7%); Prior was revised to 77.5% from 77.6%

  • The key takeaway from the report is that the jump industrial production in January was rooted entirely in the volatile component of utilities output, which surged as cold temperatures boosted the demand for heating.

• December Business Inventories -0.2% (Briefing.com consensus 0.1%); Prior 0.1%