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The S&P 500 posted a fractional decline, snapping a five-week string of positive results that had left the index at a record high. Despite the setback, the S&P 500 remained nearly 22% above a recent low in late October. The Dow finished the week essentially flat while the NASDAQ slipped more than 1%. As I predicted last week as large cap growth stocks took a breather from their recent climb and U.S. small-cap stocks continued their ascent. Small caps outperformed their bigger peers by a wide margin for the second week in a row. Small caps rose more than 1% for the week; over the past two weeks, the index was up nearly 4%. The big news of the week was the death of Russian opposition leader Alexei Navalny, I have broken down this week’s update using some of his notable quotes

“Consistency for me is everything.” – Alexei Navalny

Inflation has been falling pretty consistently since its peak in the summer of 2022. That trend seemingly reversed this week.  Stocks and bonds revolted, falling on Tuesday as a result. The move coming after a monthly inflation report showed that U.S. consumer prices rose more than most economists had expected in January. The Consumer Price Index’s (CPI) annual rate coming in at 3.1% and a separate report on Friday reinforced the narrative of continuing inflationary pressures, with wholesale prices rising at the fastest pace in five months.  The latest inflation data dampened investors’ expectations for any interest-rate cuts over the short term.

Government bond yields rose for the second week in a row. The yield of the 10-year U.S. Treasury bonds closed at 4.30% on Friday, up sharply from a recent intraday low of 3.82% on February 1st. The recent data supports what I have been saying for weeks that the Fed will not be in a hurry to cut rates and that the market was overly optimistic about the size and timing of potential cuts. I do think despite the numbers core inflation will continue to trend downward and the Fed will probably start to cut rates at the tail end of this year. Here’s why, a deeper dive into the CPI report shows inflation did moderate in some of the previous problem areas like in used car and truck pricing. The most critical component of core inflation, shelter and rent did move higher. That component accounts nearly one-third of the overall CPI basket. It is still up 6% on a year over year basis. As I have mentioned previously, shelter and rent is a lagging indicator.  Eventually shelter inflation will cool and we will see core inflation will continue to fall.

“I am not ready to back away from my views.” – Alexei Navalny

Consumer’s are continuing to view the economy favorably. A survey of U.S. consumers’ sentiment about the economy rose for the third month in a row, climbing to the highest level since July 2021. The University of Michigan’s February sentiment reading rose to 79.6. The figure is up sharply from a recent low of 61.3 in November. It will be interesting to see how long consumers are able to keep this conviction because while they are preaching confidence in the survey, they are not showing it with their wallet. U.S. consumers trimmed their spending more than expected after the holiday shopping season. In January, retail sales fell 0.8% on a seasonally adjusted basis compared with the previous month. In addition, sales figures for December and November were revised lower than the initially reported numbers.

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