Markets Rally on Cooler Inflation Data

Here's a story about two very different groups of investors looking at the same set of facts and reaching completely opposite conclusions. But first, the facts themselves.

Core Consumer Price Index data came in cooler than expected this morning, and the stock market loved it. Here's the breakdown: Headline CPI hit 0.3% versus 0.3% consensus, which is basically a non-event. But core CPI, the number that actually matters, came in at 0.2% versus 0.3% consensus. That difference might sound small, but in early trading it was enough to send S&P 500 futures screaming above 7000 as traders rushed in aggressively.

Meanwhile, ADP data showed the private sector added an average of 11,750 jobs per week over the four weeks ending December 20. Not exactly fireworks, but consistent with a labor market that's cooling without falling apart.

Earnings Season Arrives Right on Schedule

JPMorgan Chase & Co. (JPM) kicked off earnings season this morning, and if you've watched this stock for any length of time, you know exactly what happened next. The bank reported earnings roughly in line with consensus and whisper numbers. Trading revenues were very strong, which makes sense given recent market volatility. Investment banking revenues came in below consensus, which is less exciting but not exactly shocking.

The stock did its usual post-earnings dance: spiked immediately after the report, then pulled back. Almost every quarter, JPMorgan follows this pattern. The chart shows JPM didn't quite reach resistance levels on the earnings news. What's more interesting is the steady climb since the April 2025 low. The stock is trading at $323.49 in premarket as of this writing. For context, some portfolios hold positions from an average of $34.14, which would make this morning's price rather pleasant to look at.

For those not already in the stock, the play here is waiting for a dip into attractive buy zones rather than chasing the premarket spike.

Also worth noting: Delta Air Lines Inc. (DAL) reported earnings this morning that came in below both consensus and whisper numbers. Airlines remain a tough business, apparently.

Looking ahead, Bank of America Corp (BAC), Citigroup Inc. (C), and Wells Fargo & Co (WFC) will report tomorrow in premarket trading. This parade of bank earnings will give us a clearer picture of how the financial sector is actually doing beyond one data point.

The Great Divide: Momentum Traders vs. Gold Bugs

Now here's where things get interesting. A real dichotomy has developed between the stock market and the gold market over questions about Fed independence, and it reveals something important about who's buying what and why.

The stock market, at least right now, isn't particularly concerned about the Fed potentially losing its independence. Yesterday morning there was a brief battle between the momentum crowd and smart money when news broke about the Powell investigation. The momentum crowd won, aggressively buying the dip. Their logic is wonderfully simple: if the Fed loses its independence, that's actually good because it means lower interest rates. Problem solved, let's buy stocks.

The gold market sees things very differently. Gold investors are very concerned about the Fed potentially losing its independence, and they're buying gold as an antidote to exactly that risk. This isn't about interest rates to them. It's about institutional integrity, policy predictability, and the kind of structural uncertainties that make people want to own shiny metal that's been valuable for thousands of years.

Same news, completely different reactions. Investor behavior in the gold market looks nothing like investor behavior in the stock market right now, which tells you something about risk perception and time horizons.

Trump's Affordability Agenda Takes Shape

President Trump is clearly focused on affordability themes heading into the midterm elections, and he's making some interesting moves.

First, he's urging support for the Credit Card Competition Act, which would curb swipe fees. This is one of those issues that sounds technical but hits consumers directly every time they buy something.

Second, Trump is targeting soaring electricity prices driven by AI data center demand. His solution: make tech companies pay the cost. Microsoft Corp (MSFT) is already responding, announcing an initiative to offset the impact of AI data centers on local communities built around five core principles. Whether this is genuine corporate responsibility or just getting ahead of potential regulation is an exercise left to the reader.

Third, and perhaps most intriguing, Trump is imposing 25% tariffs on Iran's business partners. Iran's biggest business partner happens to be China, which imports about 90% of Iran's oil. Here's the key question that matters for markets: Will Trump actually enforce this tariff on China, thereby increasing friction with the world's second-largest economy? Or will China be quietly exempted, making this tariff more symbolic than substantive? The answer will tell us a lot about how the next phase of U.S.-China relations will play out.

The Supply Chain Shuffle Continues

Speaking of China, the supply chain shift away from Chinese manufacturing continues apace. Alphabet Inc. (GOOG) plans to develop and manufacture high-end smartphones from scratch in Vietnam. This isn't just about assembling components somewhere cheaper. This is about building entire production capabilities outside China.

Vietnam keeps winning these relocations, which is why some portfolios include positions in VanEck Vietnam ETF (VNM). If this trend continues, Vietnam's manufacturing base could look very different five years from now.

Japan Matters More Than You Think

Japan is important because of its impact on the carry trade in the U.S., and there are some developments worth watching.

Stocks in Japan hit a new high, but the yen weakened on confirmation that Takaichi plans for a snap election. This is significant. Right now, Takaichi has a razor-thin majority. She's hoping to gain a bigger majority to push through stimulus programs. The weakening yen is raising the specter of intervention by the Bank of Japan, which would have ripple effects across currency and equity markets.

For those tracking Japanese exposure, both iShares MSCI Japan ETF (EWJ) and Invesco CurrencyShares Japanese Yen Trust (FXY) are worth monitoring as this political situation develops.

Following the Smart Money in Mag 7

Most portfolios these days are heavily concentrated in the Magnificent Seven stocks, which makes daily money flows in these names more important than ever.

In early trading, money flows are positive in Alphabet Inc. (GOOG), NVIDIA Corp (NVDA), and Tesla Inc. (TSLA).

Money flows are neutral in Amazon.com, Inc. (AMZN) and Meta Platforms Inc (META).

Money flows are negative in Apple Inc (AAPL) and Microsoft Corp (MSFT).

Broader market flows are positive in both SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (QQQ), which aligns with that enthusiasm over cooler core CPI data.

For those tracking precious metals and commodities, the most popular ETFs are SPDR Gold Trust (GLD) for gold, SLV for silver, and United States Oil ETF (USO) for oil. Knowing when smart money is rotating into or out of these assets can provide an edge beyond just watching stock indices.

Other Market Notes

Bitcoin (BTC) is range bound, which after recent volatility probably counts as boring in a good way.

Results of the $22 billion 30-year Treasury bond auction will be announced at 1pm ET. If the auction is weak, it could be market moving, especially given recent concerns about long-duration debt.

Portfolio Positioning in This Environment

In an environment like this, with cross-currents pulling in different directions, consider continuing to hold good, very long-term existing positions. Based on individual risk preference, consider a protection band consisting of cash, Treasury bills, short-term tactical trades, and short to medium-term hedges. This approach lets you participate in upside while protecting against downside.

You can determine your protection bands by adding cash to hedges. The high band of protection is appropriate for those who are older or conservative. The low band is appropriate for those who are younger or aggressive. If you don't hedge, total cash levels should be higher than if you do, but significantly less than cash plus hedges combined.

A protection band of 0% would be very bullish, indicating full investment with zero cash. A protection band of 100% would be very bearish, indicating aggressive protection or even short selling.

It's worth remembering that you cannot take advantage of new opportunities if you're not holding enough cash. When adjusting hedge levels, consider using wider stops on remaining positions and allowing more room for high beta stocks, the ones that move more than the market.

The Bond Allocation Question

For those following traditional 60/40 portfolios (60% stocks, 40% bonds), probability-based risk reward adjusted for inflation does not favor long-duration strategic bond allocation at this time.

If you want to stick to traditional 60/40 allocation, consider focusing on only high-quality bonds and bonds of five-year duration or less. Those willing to bring more sophistication to their investing might consider using bond ETFs as tactical positions rather than strategic positions right now. The distinction matters: tactical means you're trading around conditions, strategic means you're setting and forgetting.

In a market where the momentum crowd is buying dips on Fed independence concerns while gold investors are buying protection against the same risk, knowing which camp you're in matters more than usual.