I I’ve said many times in the past that traders are conditioned to overreact. Imagine sitting in a trading room all day focusing on just one thing: oil futures, a currency pair, stocks in a particular industry, or whatever. Any news or data affecting something has an exaggerated meaning, so overreaction is normal and understandable. However, sometimes the market can work together to do the opposite. It can be the voice of reason, pointing out the fact that some news that sounds scary when covered breathlessly by the media is, in fact, not that big a deal, in fact.
We saw two of these cases in two and a half hours this morning.
The first reluctant response came at 7 a.m. after the CDC and FDA issued a joint statement calling for a break in Johnson & Johnson’s administration (JNJ) Covid19 vaccination. You might think that a stock market that has recovered from the pandemic, fully priced in at least at these levels, wouldn’t get this news well, but you would be wrong.
There was of course some initial selling, but after the S&P 500 E-Mini Futures Contract ES fell about 0.5% in the first five minutes after the news it found a low and began to rebound. If you read this actual statement Instead of the headlines surrounding the story, that shouldn’t come as a surprise at all. What the CDC said was that a total of 6 cases of a rare type of blood clot were reported after people received the J&J vaccine, but it was also noted in the opening sentence that more than 6.8 million doses were given in America had been. They also stated that the reason the vaccine was discontinued was so that the medical community should be on the lookout for this disease, as treatment, in the same way as other blood clots, actually exacerbates the problem.
Of course, taking a vaccine off the market for a while is not a good thing. If nothing else, it will encourage conspiracy theorists and low-information types to speak out against vaccination, but these people in general were a lost cause long before this news broke. In addition, however, the market recognized that vaccinations are advancing rapidly even without J&J, and the 70-80% target, which will allow a return to normal, is in sight.
This was unfortunate for J&J and good for Moderna (MRNA) and others, but otherwise ultimately no market history.
At 8:30 am, we got the much-anticipated CPI data for March, and there, too, the response has been much less than you might expect if you just watched the headlines. According to the Labor Statistics OfficeOverall, consumer prices rose 0.6% last month, above the consensus estimate of 0.5%. In a market where inflation has been faltering lately, every hit of the expected number seems like a potential disaster, but that dataset actually sparked a slightly positive response.
What has worried the market is not inflation per se, but the Fed’s possible response to inflation. In general, the March CPI report made it less likely that rate hikes would be considered anytime soon. It can be frustrating for non-economists, but the Fed is only concerned with so-called “core inflation” – the prices of everything but food and energy. This doesn’t make sense in a household where food and energy prices are such a large part of the budget. However, since most food and energy are commodities and therefore volatile, they are not viewed as indicators of underlying price pressures.
The Fed’s target for core inflation has long been 2%, so the annualized 1.6% this morning was a tad higher than estimated, but a very reassuring number for traders. Not only is inflation not a problem in the eyes of the Fed, it is actually too low, which means there will be no more rate hikes or reduced asset purchases anytime soon. Hence this reaction in ES:
This morning was a classic example of why just reading headliners is dangerous. It is not advisable in our daily life but it can be extremely expensive as a trader. Fortunately, the market this morning ignored the “Covid vaccine suspended due to safety concerns!” and “prices are rising more than expected!” Headlines and when all was said and done, returned to open about where we were before the news. Keep calm and keep trading!
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.