Lack Of Breadth Glaring Issue

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

A lack of breadth kept most sectors down for the week. Only two sectors - Communication Services & Consumer Cyclical - finished in the black last week.  Markets got a little spooked by the higher than expected inflation data.  The Producer Price Index (PPI) especially surprised, putting year-over-year PPI ahead of CPI (Consumer Price Index), which could be a sign of higher inflation moving forward.  And yet, in spite of the data, futures show at least a 97% probability of another Fed rate cut this week when the central bank meets on Wednesday.  Lower rates would spur greater economic activity, which would in turn, likely lead to higher inflation.

The yield curve has been inverted for more than two years, but the final leg of the curve (10yr vs 3mth) finally uninverted last week.  This is typically a sign of economic trouble ahead.  It can take some time for this indicator to come to fruition, varying from 12 months to 1 month preceding a recession.  Meanwhile, investors continue piling into equities.  November say record inflows into large cap equity ETFs, while corporate insiders continue selling shares.  A lack of breadth is indicative in the number of stocks out-pacing the S&P 500 Index.  Currently only 31% of the components of the index are actually out-performing the benchmark - reminiscent of 1999.  Investors will be eyeing the language from the Fed to get a clue as to what next year's policy might look like.

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