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STOCKS FINISH BEST WEEK OF THE YEAR: Here's what you need to know

STOCKS FINISH BEST WEEK OF THE YEAR: Here's what you need to know

Myles Udland

Stringer/Reuters

Stocks finished their best week of the year with a mixed session that saw futures open lower before ultimately closing the day little changed.

For the holiday-shortened week, the Dow and S&P 500 both gained more than 2.5% while the Nasdaq added almost 4%.

First, the scoreboard:

Dow: 16,390, -22.5, (-0.1%)
S&P 500: 1,917, -0.2, (-0.01%)
Nasdaq: 4,504, +17, (+0.4%)
WTI crude oil: $32.00, -3%

Inflation

Inflation is here.

Consumer prices were flat in January while "core" consumer prices - which exclude the more volatile costs of food and gas - rose 0.3% from the prior month, beating expectations. This monthly increase was the largest since May 2006, according to BNP Paribas.

Compared to last year, "core" prices rose 2.2%, the fastest rate in over four years as fears of deflation appear clearly misplaced.

"You can clear all those thoughts of deflation, deficient demand, and secular stagnation away because the CPI report says this economy is heating up," Chris Rupkey at MUFG said on Friday.

"Everything is going up, it is striking how of the major categories of goods and services, consumers are paying more for everything, new cars, used cars, clothing, medical care commodities and services, transportation, shelter. Even commodities less food and energy rose 0.2% for the first time in many a moon and these were supposed to be held down by 'a strong dollar and falling import prices' the Fed economic staff maintained: not anymore. Net, net, the Fed is behind the curve."

We'd note, however, that the Fed's preferred measure of inflation is the PCE deflator, which has lagged CPI in recent months and still shows the Fed below its 2% inflation target.

Yahoo

Yahoo's board formed a committee to "explore strategic alternatives."

Which is, I mean, sort like the bare minimum of what you'd expect the company's board to be doing at this point.

To say the least, Yahoo has been an embattled company over the last few months.

The company has been: firing staff, bailing on its plan to spin-off its Alibaba stake, saying it would spin-out its core business, not making much progress on selling that business, and the board is also fighting.

Yahoo shares gained about 11% this week.

Stock Market

Outflows from equity funds accelerated last week, marking the seventh-straight week that money has moved out of stocks, the longest streak since 2008. Last week's exodus was the largest yet.

According to analysts at Bank of America Merrill Lynch, the rate at which money is moving out of these funds indicates capitulation by investors. And given the rally in stocks seen this week, investors finally giving up right as things turn around is completely consistent with the psychology of capitulatory moments.

In a note on Friday morning Kit Juckes at Societe Generale said the action in financial markets over the last few days indicates that perhaps the worst of the volatility we've seen to start the year is over.

Of course, investors will remember how 2015 went: rocky start, big lull, volatile late summer/early fall, and with the US election lingering and political instability seeming ready to re-emerge in Europe, 2016 is looking at a similar set-up.

But even in the most volatile years you can't just have markets making huge moves all of the time, and so if the weeks between now and the March Fed meeting serve as a calm period we wouldn't be shocked.

Commodities

John Deere cut its outlook for the year, forecasting a rough year for the farming and construction industries. Deere is seen a bellwether of international farming and construction activity because, much like rival Caterpillar, the company sells the kind of big machinery you only invest in if things are going well.

In its earnings release, Deere said its results, "reflected the continuing impact of the downturn in the global farm economy as well as weakness in construction equipment market."

Shares of the company fell about 4% on Friday.

Crude oil prices also fell about 3% on Friday which, as we've written before, would have been news on its own some time ago but now sort of seems like a normal day. And given how many days this year we've seen crude prices rise or fall at least 5%, what's 3% between friends?

The latest Baker Hughes rig count, meanwhile, continued to show a collapse in rigs being used by US oil producers with active rigs falling by 26 this week to the lowest total since December 2009.

Also in oil news, Former Fed chair Ben Bernanke looked at the relationship between crude oil prices, stock prices, and why stocks and crude move together. The verdict? Partly worries about demand, partly a result of heightened volatility across the universe of investable assets.

Here's Bernanke (emphasis ours):

Our bottom line: The tendency of stocks and oil prices to move together is not a new development; it goes back nearly five years (the limits of our sample) and probably more. Much of this positive correlation can be explained by the tendency of stocks and oil prices to react in the same direction to common factors, including changes in aggregate demand and in overall uncertainty and risk aversion. However, even accounting for these factors, the residual correlation is close to zero, not negative as we would expect if it were capturing only beneficial supply shocks. There are several other explanations that could be investigated: for example, the possibility that declines in oil prices, even if initially caused by higher supply, affect global financial conditions by damaging the creditworthiness of oil-producing companies or countries. This topic is one well worth revisiting.