Last Week’s Markets in Review: Can the Fed Tame Inflation?
Global equity markets were mixed for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,419, representing a loss of 1.79%, while the Russell Midcap Index moved 0.00% last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 1.42% over the week. International equity performance was higher as developed and emerging markets returned 1.43% and 1.68%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 1.94%.
Last week’s economic news cycle was dominated by one story, the Consumer Price Index (CPI) for January. Before the release of this inflation index on Thursday, market participants were anticipating and predicting a continuation of the recent trend of high levels of inflation. Predictions of future Federal Reserve actions were becoming more hawkish, with some market observers increasing the number of rate hikes to as high as seven for 2022. On Thursday, the U.S. Bureau of Labor Statistics reported that the CPI had risen by 7.5% over the last twelve months. The 7.5% increase exceeded the consensus estimate of 7.2% and marked the highest annual increase since February 1982.
Equity markets were moving higher for the week leading up to the CPI announcement. Post-release, equity and fixed income markets reacted with substantial movements. U.S. Treasury yields moved higher as the yield for the 10-year U.S. Treasury crossed the 2.0% mark for the first time since 2019. Additionally, the 2-year Treasury surged 26 basis points, the largest single-day move since 2009, and equity markets moved sharply lower. Later in the day, Federal Reserve Bank of St. Louis President James Bullard said that he supports raising interest rates by a full percentage point by the start of July.
We maintain that a great deal of uncertainty exists about the potential number of rate hikes this year. We believe that Chairman Powell and the Federal Open Markets Committee (FOMC) will maintain the gradual and deliberate approach that has been communicated to the market. With the completion of Tapering scheduled for March, likely increases to the Federal Funds Target Rate in both March and June, and the downsizing of the Fed’s balance sheet thereafter, the Fed will have put in motion multiple tools to combat inflation. During the second half of 2022, we believe that the Fed will return to its “data dependent” position. If the Fed’s actions have slowed the economy and inflation increases, we would not be surprised to see fewer additional rate hikes in the second half of the year as many are expecting. However, if inflation is still at record levels, the Fed will need to be aggressive during the latter part of 2022.
Investors should consider all of the information and data discussed within this market update and many other factors when managing their investment portfolios. However, with so much data and so little time to digest it all, we encourage investors to work with experienced financial professionals to help process all of this information in order to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.
Congratulations to the Rams on winning the Super Bowl, and best wishes to everyone for the week ahead!
Consumer Price Index data and the graph (above) are sourced from the U.S. Bureau of Labor Statistics. Equity Market and Fixed Income returns are from JP Morgan as of 2/11/22. Rates and Economic Calendar Data from Bloomberg as of 2/11/22. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using the GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.
Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.