The week in review

• Headline/core CPI: 5.3%/4.0% y/y
• Initial claims increased to 332K
• Retail sales rose 0.70% m/m

The week ahead

• FOMC meeting
• Mfg./services PMIs

Thought of the week
Since the beginning of May, 59% of S&P 500 constituents have experienced a peak-to-trough decline of at least 10%. However, over the same time period the S&P 500 has spent 88% of days without moving up or down by more than 1%. So with things calm on the surface but a number of cross-currents racing below, what could cause an index correction? To start, the lack of an index-level correction has been due to the continued outperformance of the S&P 500’s largest names, many of which reside in the technology sector. As shown in the Chart of the Week, S&P 500 price return dispersion at the sector level has not been evenly distributed. On the one hand, current prices in the energy, materials and industrials sectors are flat/down relative to the end of April, whereas prices in the technology, real estate, communication services and health care sectors are hovering just below their local peaks. With the exception of real estate, the sectors that have demonstrated this resiliency tend to have a “growthier” tilt, suggesting that an upward move in long-term rates poses the biggest threat to these parts of the market. With August’s inflation report marking the 4th straight month of y/y headline CPI of +5% and the Federal Reserve likely to announce tapering plans in its November meeting, we continue to expect rates will increase into year-end; this could pressure growth stock valuations, and potentially lead to more meaningful pullback at the index level.

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