Some Good News

By Alex Eule  |  Friday, July 15

TGIF. Stocks staged an impressive rally Friday, thanks to a strong, but not-too-strong, retail sales report and a good enough set of earnings results. The Dow Jones Industrial Average jumped 658 points, or just over 2%. The S&P 500 finished the day up 1.9% and the Nasdaq Composite rose 1.8%. 

Friday's optimism wasn't quite enough to wipe out a generally dismal week of trading, though, highlighted by Wednesday's red-hot CPI inflation report. The S&P and Dow had both fallen for five consecutive days heading into the open. The S&P has now fallen in 12 of the last 15 weeks. 

But today was a different story, right from the opening bell. 

Citigroup soared 13% on its quarterly results, offering hope that the still-young earnings season could actually be a positive for the market. It was the stock's best day in more than two years, and it's largest post-earnings bounce in at least five years. Barron's Carleton English noted strong results in Citi's trading and "treasury and trade solutions" units. It helps that Citi trades at a discounted valuation, as investors await a turnaround at the bank. 

Next week's results from IBM, Netflix, Snap, and Twitter will offer clues to another pressing question: Just how bad is the environment for tech? Tech analysts have been busy cutting estimates across the board, so expectations are low and getting lower. 

Aside from earnings, investors remain preoccupied with the next Federal Reserve meeting, set to start on July 26. The two-day meeting will culminate with the Fed's all-important monetary policy decision, with markets trying to figure out just how high the rate hike will go. Earlier this week, there was near unanimity around an almost unprecedented increase of 100 basis points, or one percentage point. By today, investors were back to betting on a three-quarter point hike. The lowered expectation -- futures markets now show just a 31% chance of the one point move -- also helped to boost stocks. 

Part of the rate-adjustment followed this morning's retail sales report, which on the surface was stronger than expected, up 1% in June. My colleague Megan Cassella explains that the numbers still managed to thread an important needle.

·        "The numbers, though strong, are not quite keeping up with the pace of inflation, however: Consumer prices climbed 1.3% in June alone, so much of the growth in spending is simply because prices are higher." 

·        "The healthy but slowing sales data, meanwhile, shows that consumers are—at least for now—willing to spend through some price increases while cutting back in certain areas."

Later in the morning, investors got more good news. Here's Barron's Lisa Beilfuss:

The bigger policy clue came later on Friday. Fed officials indicated a substantial increase in the University of Michigan’s five-to-10 year inflation-expectations gauge spooked them enough in May to throw out guidance and hike rates by 0.75 percentage point. That figure was later revised lower, to a still-elevated but less-alarming 3.1%. Then the preliminary July reading came in at 2.8%, the lowest in about a year. While that’s subject to revision, it wouldn’t happen before the next rate decision.

A fall in longer-term inflation expectations doesn’t negate the ugly June CPI or, as Richard Curtin, director of the Michigan survey says, “the deleterious effect” of rapidly rising prices on households’ personal finances. But it probably does take a one-percentage-point rate hike off the table.

And that was enough for a Friday rally.  

DJIA: +2.15% to 31,288.26
S&P 500: +1.92% to 3863.16
Nasdaq: +1.79% to 11452.42

The Hot Stock: Citigroup +13.2%
The Biggest Loser: Constellation Energy -3.9%

Best Sector: Financials +3.4%
Worst Sector: Utilities +0.2%