CPI: Look to Russell 2000 to understand market sentiment

The Consumer Price Index's (CPI) core metric for the month of April matched expectations, rising 3.4% year-over-year. US Equities (^GSPC, ^DJI, ^IXIC) have begun to rise in response to this data on Wednesday morning.

Yahoo Finance Reporter Josh Schafer joins Morning Brief to break down the latest CPI report and what it means for the overall market.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Nicholas Jacobino

Video Transcript

Well, Wall Street right now, it's cheering on April's CP I print showing the fact that inflation may be cooling at least on a headline basis.

Core inflation also coming in in line with expectations.

And we are seeing green right now across the screen in reaction to that print.

But we want to take a closer look at the typical stock performance after these inflation prints and who better to ask than our very own Josh Shafer.

So Josh break down the action that we're seeing this morning and how that relates to the action that we've seen over the last several reports.

Yes, Shona.

So when you take a look at how stocks have typically reacted to CP I prints, this is using data over the past year, you would see that the S and P 500 with a reading like today would normally be about flat by the day.

And now of course, we're still only in pre market trading.

So it's a little tough to make too, too much of the moves right now.

But you're seeing a bit of an out size move to what you would typically see off this kind of CP I print and you guys were just mentioning, I think it's because today is a little bit of a different CP I day where we also have retail sales, you have retail sales come in weak, weaker than expected retail sales flat.

In April, you sort of combine that with signs that inflation is slowing which again, inflation in mind, but it showed that inflation is slowing.

I think that's why you maybe get a little bit of an outsized performance.

The other side that we looked at here was also the Russell 2000 and small caps.

And normally you would see outsized performance from areas like small caps areas like nonprofitable tech when we have an in line print or even a better than expected print.

So the uh normally you'd see out performance from the Russell to some extent there.

And again, I think when you look at futures right now, futures tied to the Russell 2000 are outperforming the S and P 500 largely because you see consumer spending slowing down a little bit inflation coming down.

That sort of fits your, we might get a rate cut at some point this year narrative.

And normally that helps small caps, right?

And so all that considered, I mean, where are we expecting to see some of the out performance if we have a plateau and inflation like Greg Daco from Ey was telling us about over the summer here as well.

Yeah, I mean, I think if you have a plateau brad that's really weighed on small caps, right?

It's weighed on small caps.

It right on the weight on the riskier areas of the market, like a nonprofitable tech sector.

And that has not performed that well.

If the, if we have a, like you said, a plateau inflation over the summer, then you're probably, people are gonna start pricing out rate cuts again.

Right?

And as you price out rate cuts, we've clearly seen on days that that happens, you can look at the Russell 2000 and it basically for the last year has always done worse than the S and P 500.

So it's usually a goodwill measure to see what people are pricing in that day and sort of what the reed is on the fed if you look and the Russell is well below the S and P 500 it usually means people aren't feeling, feeling too bullish on rate cuts and sort of vice versa as well.

Yeah.

Yeah, exactly.

It's really important to point out and it also tells us maybe about what the leadership will likely see then or lack thereof or underperformance that we could see in the markets over the months to come.

All right, Josh, thanks so much.