Stocks rally on strong eco data, tech bounces — Geopolitical risks elevated

Stocks ended the day higher on the back of a string of strong economic data confirming that the U.S. economy remains resilient. First up were the Services PMI numbers — both S&P and ISM — and they remain solid. And I say remain solid because the services economy never actually broke. Remember, the U.S. is roughly a 75% services economy, so these data points matter.

Then we got ISM Services New Orders and ISM Services Employment, both stronger than expected, which only added to the momentum. And the good news didn’t stop there. ADP Employment showed 63k new jobs created versus the 50k expected. Mortgage applications — a direct read on the health of the housing market — surged 11%. Now some of that is seasonal, but part of it is also the fact that mortgage rates have slipped below 6%, making home buying a bit more affordable again. In fact – just for the record – mortgage rates are now DOWN 14.5% since Biden left office.

But the number I was most focused on was the Prices Paid component. Expectations were for it to rise to 68.3, which would have suggested renewed inflation pressure. (not good). Instead, we got a surprise. Prices Paid didn’t rise — it dropped sharply, falling from 66.6 to 63.0. That’s roughly five points below expectations, which is a pretty stunning reversal and suggests inflation pressures in the pipeline may actually be easing.

At 4 pm – here is how it looked – The Dow added 238 pts or 0.5%, the S&P’s up 52 pts or 0.8%, the Nasdaq gained 290 pts or 1.3%, the Russell added 27 pts or 1.1%, the Transports rose by 26 pts or 0.15%, the Equal Weight S&P added 32 pts or 0.4% while the Mag 7 tacked on 480 pts or 1.5%.

Now those gains in the tech sector make sense, right? The group has been beaten up pretty hard, with some names even slipping into bear market territory. And when that happens, long-term investors begin to view it as an opportunity to accumulate quality assets at a discount, while traders tend to see those kinds of dislocations as short-term opportunities to step in and play the bounce. Either way it was a good day.

The XLK gained 1.7%, ARKK + 3.7%, ARKW + 4%, the Growth Trade – SPYG + 1.1%, Cybersecurity + 1.2%, Semi’s +2%, Software +1.8%, Quantum Computing + 1.3%.

In addition, we saw strength in a number of other sectors. Consumer Discretionary led the way, up 1.8%, followed by Communications +0.7%, Financials +0.6%, Utilities +0.4%, Industrials +0.3%, Healthcare +0.2%, and Real Estate up about 0.15%, Aerospace & Defense up 1%, Big Pharma + 0.25%, Biotech + 2.4%,

We did see some weakness in Energy, down 0.6%, and Consumer Staples, which fell 0.7%, and both of those moves tell an important story about investor psychology. Energy had been up about 26% coming into yesterday, so some of that decline is simply traders and investors taking a few chips off the table after a big run.

Staples, on the other hand, have been part of the defensive trade, up roughly 13% year-to-date as investors sought safety during the recent bouts of volatility. But when investors begin to feel a little less anxious, they tend to rotate money out of defensive sectors like Staples and into more cyclical or growth-oriented sectors — what I like to call the “sexier” parts of the market.

So that rotation out of Staples and into areas like Tech, Communications and Consumer Discretionary suggests that investors are becoming less anxious.

Now while all of that economic data helped support the market, investors remain focused on ‘Epic Fury’ and the events unfolding in the Mid-East. Yesterday – Secretary of Defense – Hegseth – told us that ‘we’ now command the skies over Iran, we have destroyed their naval assets, and we are about to castrate whatever remains of their military assets.

Ok – that’s all good and while the U.S. economy continues to show resilience, the bigger question is whether events overseas begin to create new risks for markets — particularly when it comes to energy, global trade routes, and investor confidence.

At the center of the issue sits the Strait of Hormuz, one of the most important energy chokepoints in the world. Roughly 20% of global oil and LNG flows move through that narrow corridor each day. As long as the strait remains open, markets can function. But any disruption there would trigger a broad repricing across energy markets, inflation expectations, and interest rate outlooks globally.

Higher oil prices feed into inflation through transportation, manufacturing, and energy costs, which is why markets immediately react when crude spikes. While the United States is far less vulnerable to energy shortages than it once was — now producing more than 13 million barrels per day — sustained increases at the pump can still influence consumer sentiment and inflation expectations. That leaves the Federal Reserve facing a familiar dilemma: keeping rates higher for longer to guard against inflation, or ease policy and risk allowing another price surge to take hold.

That said, the expectation is not that inflation suddenly spins out of control. What markets are reacting to right now is the risk of higher energy prices pushing headline inflation higher, not the start of a new structural inflation cycle. Unlike in the 1970s, the U.S. is now the world’s largest oil producer, which helps buffer the domestic economy from external supply shocks. Energy also represents a relatively small share of overall inflation, meaning higher gasoline prices may temporarily lift CPI but are unlikely to create sustained inflation unless they begin to influence wages and broader pricing behavior. For now, this looks more like a geopolitical risk premium being priced into markets rather than the beginning of a runaway inflation cycle.

Yesterday oil traded up 2% or $1.55 and this morning it is up 2.6% or $2 a barrel at $76.60 leaving it up 15% since last Friday and up 40% off the December lows which is about $22 move and that adds about 50 cts to the price of a gallon of gas. An increase I am happy to pay for if it makes the world a safer place and eliminates a global threat.

Now treasuries have been a different story, they usually benefit from geo-political angst in a flight-to-safety bid. That has not happened this time – Bonds have come under pressure and rates have risen just a bit. The TLT is down 1.5% and the TLH is down 1.4% since this began. 10 yr treasuries have gone from 3.92% to 4.11%, 30 yr treasuries have gone from 4.60% to 4.76%.

In past crises investors would have rushed into U.S. government bonds, pushing yields lower as risk assets sold off. This time, however, yields have risen, suggesting that investors are more focused on the inflation implications of higher oil prices than on seeking immediate safety.

Again, I think this is misplaced. If energy prices remain elevated, the concern is that headline inflation could move higher again, potentially forcing the Fed to keep policy tighter for longer. As a result, the usual safe-haven trade into Treasuries has been muted, with markets balancing geopolitical risk against the possibility of renewed inflation pressure.

Gold – the ultimate safe haven play remains strong…This morning it is up $20 at $5,160 and appears to be stuck in this $5,000/$5400 trading range. As long as the conflict goes on, gold will find a bid, once we see the conflict ease – my bet is that investors will take some of these dramatic profits off the table. That being said – expect to find buyers defend the trendline at $4,850.

The VIX – the fear index – is beginning to settle down…. The VIX surged by 60% - trading as high as 27.1 when the news broke - it has since given back 27% of that move suggesting that the markets and investors are becoming convinced that this conflict will see Iran come to her knees. This morning, the VIX is down 20 cts at 21.07 – trendline support – is at 17.63.

The dollar – has also been a beneficiary considering it is still a safe-haven asset. Since Monday the dollar is up about 1.8%, and it’s now up roughly 4.3% since the January lows, continuing to attract buyers. This morning it’s up another 25 cents, trading around 99, and importantly it remains above all three key trendlines, which tells you the momentum is still intact. My sense is that the dollar continues to grind higher in more of a stair-step pattern, with 100.50 or so as the next near-term target.

European markets are in the plus column but only slightly as they continue to digest all of the recent volatility.

U.S. futures are mixed this morning. Dow futures -85 pts. S&P’s flat, Nasdaq up 9, while the Russell is down 8 pts.

Eco data today includes – Challenger Job Cuts, Unit Labor Costs and the usual Initial Jobless Claims and Cont. Claims.

The S&P closed at 6,869 – up 52 pts – but not before breaching trendline support at 6835 – to trade as low as 6811. This morning futures action suggest more digestion – no reason to break down yet no reason to surge up and thru…..And that suggests that investors, traders and even the algo’s are getting more comfortable the current state of affairs.

Now that does not mean that the tone has completely changed, it remains skittish…..the headlines will cause ongoing concerns… I still suspect – a test of the long term trendline at 6580 is not out of the question over the next month or so.

Tagliata florentina

There are only a couple of ingredients…. Thin sliced rib eye, s&p, olive oil, fresh arugula, sliced red onion and shaved Grana Padano.

Just FYI – Grana Padano – is one of the most popular cheeses in Italy. It has a distinctively grainy texture and comes from the Pianura Padana region (Po Valley, Northern Italy). It is a semi-fat hard cheese which is cooked and ripened slowly – minimum time to ripen is 9 months for Grana Padano and up to 20 + months for Grana Padano Riserva – which is more grainy, crumbly and fully flavored.

Season your rib-eye with s&p and massage with a touch of olive oil…allow to rest at room temp for 15 or 20 mins.

Heat your grill – Place the rib-eye on the grill and sear for 3 mins and then flip over and cook for another 3 to 5 mins – depending on thickness – but for this you should use a thin sliced rib-eye…..

Now to make it ‘Tagliata’ style – all you do is slice it at an angle and then fan it out on the plate. Cover with fresh arugula, chopped red onion. Dress with a squirt of fresh lemon and olive oil. Then place the slices of the Grana Padano on top.

Serve immediately with a house Chianti. This dish is about simplicity.