Major stock market averages opened mixed this morning (Dow flat; SPX +.37%). Energy stocks are sinking on lower oil prices. On the other hand, consumer discretionary (+.8%), materials & tech (+.7%) are faring well. Overall, the stock market’s trend has been upward since the 6% correction in early August, and it is now close to all-time highs again. The same cannot be said of most overseas stock markets, which have generally underperformed the US for a decade or more.

The VIX Index fear gauge has fallen to 14.5, considered very low, and VIX October futures are trading down around 17.2. So there’s no real panic in the air, but certainly investor sentiment is low. That may be changing, however. We’ve seen some better than expected economic data recently, and second quarter corporate earnings weren’t a disaster as feared. Furthermore, the Federal Reserve seems willing to ride to the rescue of the stock market. The American Assn. of Individual Investors’ US Investor Sentiment Bullish Readings survey has risen from an incredibly low 21.6% to a more average 33% in the span of just one month.

The Consumer Price Index (CPI) decelerated in August to 1.7% year-over-year growth, from 1.8% in the prior month. This is the most commonly cited measure of retail price inflation in the US and it has been slowing for the past year. You’ll doubtless see some headlines today referring to firming (or rising) CPI. That’s because CPI excluding food & energy prices (“Core CPI”) picked up to 2.4% from year-ago levels compared with 2.2% in the prior month. This report is consistent with PPI (wholesale inflation) and suggests the economy isn’t falling off a cliff. Bloomberg economists say firming CPI will “eliminate any chance of a 50 basis point [interest rate] reduction” by the Federal Reserve later this month. Why? They say CPI at 2.4% is consistent with the Fed’s target inflation rate for the economy. Remember, rate cutting by the Fed is normally the reaction to a deteriorating economy with higher unemployment and lower inflation. So any signs that the economy is stable or improving should reduce the chances of future rate cuts.

Speaking of unemployment, stock market bears were sad to learn that weekly initial filings for unemployment insurance continue to hover at multi-decade lows. Jobless claims are a closely-watched gauge of the likelihood of economic recession because they can reveal spikes in layoff activity almost in real time.

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