Inflation Rears Its Ugly Head, But Is It Scary Enough to Change This Market?

The market dropped sharply at the open on Wednesday following a hotter-than-expected CPI report. The primary problem was price increases in lodging, airfares, and car insurance, but there was also an uptick in food prices.

Interest rates jumped on the news, and the odds of a Fed interest-rate cut later this year dropped, but the response in equities has been fairly mild so far. Dip buyers bought the open, and the S&P 500 has already recovered about half of its loss.

Breadth is running quite weak, with around 2,300 gainers and 7,400 decliners, which is mainly due to weakness in small-caps. The Magnificent Seven MAGS is slightly positive as it is enjoying some "safe-haven" buying and a rebound in Tesla TSLA.

The big question now is whether this inflation scare is going to change the character of the action. There has been quite a bit of concern that tariffs would be the issue that triggered an uptick in inflation, but so far, nothing has been put into place yet, so there is nothing to measure.

When the market reacts to macroeconomic news such as inflation, it tends to produce very lopsided breadth because index and sector ETFs are bought or sold. Every stock in the ETF or index is bought or sold regardless of its individual merit or lack thereof. That creates mispricing and can lead to good opportunities, but it is hard to precisely know when the market may start to appreciate when a stock is mispriced.

While I’m inclined to buy some pullbacks, I’m not confident that this inflation scare will be dismissed easily. Bonds are acting much worse than stocks, which is a concern. Interest rates will always eventually matter, and they are not market-friendly.

The close will be the key on Wednesday. If the bounce fades and there is a close near the lows of the day, that suggests a change in market character is taking hold.

At the time of publication, Rev Shark had no positions in any securities mentioned.