A hot inflation print and the growing concern of a Russian invasion of Ukraine sent stocks tumbling late in the week, leaving major indices lower for the five-trading days.
The Standard & Poor’s 500 retreated 1.82%, while the Dow Jones Industrial Average skidded 1.00%. The Nasdaq Composite index slumped 2.18%. The MSCI EAFE index, which tracks developed overseas stock markets, advanced 2.26%.1,2,3
I'll Say It Again
Get out of Real Estate as an investment (your home and investment property you own are all good) and get rid of any growth stock funds unless they are more than balanced by similar value-tilted funds. I expect these trends to continue.
A Double Whammy
Mid-week, a fresh batch of positive corporate earnings surprises lifted investor sentiment, helping stocks claw back losses with technology stocks posting some of the sharpest gains. But January’s inflation report, set for release on Thursday morning, remained investors’ biggest concern.
When the report hit, it showed accelerating inflation, and stocks dropped and bond yields bounded higher. Stocks managed to recover from the initial reaction to the unexpectedly high inflation number. But when the President of the Federal Reserve Bank of St. Louis commented that the Fed may consider a more aggressive move against inflation, stocks resumed their slide lower. The stock skid accelerated into Friday on White House reports that an invasion of Ukraine by Russian forces may be imminent.4
Prices of consumer goods accelerated in January, rising 0.6% from the previous month and 7.5% year-over-year. This annual inflation rate was the highest since 1982. Core inflation, which excludes the more volatile food and energy prices, was 6.0% higher from last January.5
Many economists and market analysts had expected inflation to moderate, but driven by a surge in prices of used cars, gasoline, and energy, inflation remained at elevated levels. The persistence of inflation at these heights has fueled investor concerns that the Fed might consider a more aggressive 50-basis points increase in short term interest rate.
Back in November I thought inflation would be moderating by now. A few factors have moved to upset that prediction. First is the Ukraine crisis. The world is stockpiling fuel so they can sell it to Europe in case Russia shuts their pipelines to Europe. But note that gasoline prices decreased 0.8% in January which may be an indication of moderating energy costs soon.
On the other hand, rent prices can take a year to reflect increasing home prices, so I expect rents to continue upward for a while. The end of the Fed's program of buying Mortgage-Backed Securities should quickly lead to higher rates on new mortgages. As I said last week, real estate is likely to continue as a poor performing sector due to that dynamic. More expensive mortgages should slam the brakes on rising home prices, but the price increases already seen will continue to push up rents for a while.
Finally, the moratorium on federal student loan payments is set to expire on May 1st. If there is no further change in that plan, it will take a lot of cash out of consumers' pockets and thus reduce inflationary pressure.
What Does the Bond Market Think?
One way to measure the market's expectations around inflation is to track the "breakeven rate". That is, the difference between the 10-year nominal Treasury yield and the 10-year Treasury Inflation-Protected Securities yield. The difference is the market’s expectation of what inflation will be over the next 10 years. While the 10-year breakeven rose from 2.0% to 2.7% in 2021, it has since fallen back to 2.4%. Similarly, the 5-year breakeven rose from 2.0% to 3.2% in 2021, but has fallen back to 2.8% currently.
Bottom line, the largest "wisdom of crowds" source in the world thinks that the Fed is going to handle the inflation problem. While there will be some continued pain in the short-term, I agree.
This Week: Key Economic Data
Tuesday: Producer Price Index (PPI).
Wednesday: Retail Sales. Industrial Production. FOMC Minutes.
Thursday: Housing Starts. Jobless Claims.
Friday: Existing Home Sales. Index of Leading Economic Indicators.
Source: Econoday, February 11, 2022
This Week: Companies Reporting Earnings
Tuesday: Zoetis, Inc.(ZTS), Devon Energy Corporation (DVN), Marriott International, Inc. (MAR), ViacomCBS, Inc. (VIAC).
Wednesday: Nvidia Corporation (NVDA), Cisco Systems, Inc. (CSCO), Applied Materials, Inc. (AMAT), Shopify, Inc. (SHOP), DoorDash (DASH).
Thursday: Roku, Inc. (ROKU), Walmart, Inc. (WMT), The Southern Company (SO).
Friday: Deere & Company (DE).
Source: Zacks, February 11, 2022
“I imagine one of the reasons people cling to their hates so stubbornly is because they sense, once hate is gone, they will be forced to deal with pain.“
– James Baldwin
How to Verify Your Identity When Calling the IRS
Having all this information handy before you call the IRS will make the process faster because IRS phone operators will only speak with the taxpayer or a legally designated representative.
* This information is not intended to be a substitute for specific, individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.
Tip adapted from IRS.gov6
How to Get the Recommended 10,000 Steps a Day
Getting 10,000 steps in throughout the day (or moving at all!) might sound like an impossible goal, but there are a few small tweaks you can make throughout your day to get those feet moving. Here are a few ideas:
Tip adapted from Organizing Moms7
What is the smallest number of cars that can be driven down the road in this formation: two cars ahead of a car, two cars behind a car, and a car between two cars?
Last week’s riddle: They never move, even when we walk on them, but signs and arrows may indicate that they go “up” and “down.” What are they? Answer: Stairs.
The blue domed churches of Agios Spyridonas and Anastaseos, Oia, Santorini, Greece.
Footnotes and Sources
1. The Wall Street Journal, February 11, 2022
2. The Wall Street Journal, February 11, 2022
3. The Wall Street Journal, February 11, 2022
4. CNBC, February 10, 2022
5. CNBC, February 10, 2022
6. IRS.gov, September 1, 2021
7. OrganizingMoms.com, September 30, 2020
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Weekly Market Insights: Inflation and Ukraine Fears Cool Markets
February 14, 2022