The Stock Market Spooked by High CPI Data

Today the US stock market suffered. I am not here to restate how much the Dow, S&P 500 or NASDAQ dropped. But I would like to share one point.

Why Stock market dropped?

My theory is that the stock market suffered today, because people think the Fed would hikes rates faster and they want to wait for better bond yields. Also, according to many for the stock valuation techniques, while profits stay the same, stock prices should drop. Some of the stock valuation techniques includr dividend discount model or simply by comparing the company's inverse PE ratio to 10-year treasury yield.

So, it's fine

If the whole stock market retesting 3,900 points for S&P 500 is just a stock price valuation problem. The long term return of stock market should still be OK, especially US Dollar index today grew almost 1% and reached 104.19, which is another sign the stock market priced in strong Dollar.

We need to worry if Dollar drops with the stock market.

Yield Curve

Finally, the protagonist today is yield, which is affected by the Fed's rate hikes decision, which is affected by today's CPI data. 

But, wait a minute, if the Fed is going to raise the Fed funds rate, which is overnight, really short, greatly, would the short-term yield rises passed the long-term ones? Especially when investors are worried about huge maket downturns, when they would rather buy long-term bonds to lock in returns and push bond prices higher, long-term rates lower.

The above did not happen today. I guess investors are keeping their cash and just waiting for another stock or bond buy in opportunities. 

By the way, not only can you wait for stocks to drop more and buy, you can also wait for yields to get higher and buy bonds.

Continue to watch

• Does yield curve invert?
• Fed's rate hikes decision
• US Dollar index