Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending February 11, 2022 and Year to Date)
- Dow Jones Industrial Average®: -1.0% | -4.4%
- S&P 500® Index: - 1.8% | -7.3%
- NASDAQ Composite® Index: -2.2% | -11.8%
- Russell 2000® Index: +1.4% | -9.6%
- 10-year U.S. Treasury note yield: 1.94%
- Up 3 basis points from 1.91% on February 4, 2022
- Up 43 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Energy, +1.8%
- Weakest-performing S&P 500 sector this week: Communications Services, -3.9%
*Past performance is no guarantee of future results.
Treasury yields pass milestones after hot inflation report, equities decline for the week
Equities picked up steam early in the week but couldn’t hold onto gains after inflation readings came in higher than expected—pushing up bond yields—and geopolitical tensions increased heading into the weekend. Among major indices, only the small-cap Russell 2000 rose for the week.
- January’s Consumer Price Index (CPI) clocked in at a blistering 7.5% over the past 12 months, higher than December’s 7.0% rise and forecasts of 7.2%. On a monthly basis, prices rose 0.6% (0.4% expected), the same as December, though the pace has decelerated from October’s 0.9% gain.
- The Bureau of Labor Statistics reported that food, electricity, and housing costs were the biggest contributors to January price increases. Seasonally adjusted gasoline prices actually declined in January, but are still up 40% in the past year. Used vehicle prices are up 40.5% over the past 12 months, though January’s 1.5% gain was the lowest in four months.
- Core CPI, stripping out food and energy costs, rose 6.0% annually and 0.6% on the month. Both readings were higher than expected.
- The CPI report pushed the 10-year Treasury yield past 2% for the first time since August 2019. The two-year yield surpassed 1.5% for the first time since early 2020. The six-month yield has jumped from 0.19% to 0.69% since the beginning of the year. However Treasury yields (which move inversely to prices) fell along with equities Friday afternoon after the U.S. government cautioned about possible Russian military action in Ukraine, prompting investors to reduce risk.
Market expectations of upcoming Fed decisions continue to evolve
Markets are using inflation and employment data to forecast the Fed’s moves at its March meeting and beyond. While there is broad consensus the Fed will raise rates in March, some analysts now foresee a 50 basis point (0.5%) rise instead of the typical 25 basis points (0.25%), believing the Fed needs to catch up to sizzling inflation numbers. Markets are also pricing as many as six 25 basis point hikes this year, which would bring the federal funds rate to a target of 1.5%, though Fed officials are still talking about three or four hikes in 2022.
- Feeding the uncertainty is how quickly the Fed switched in late 2021 from viewing inflation as “transitory” to a potentially significant threat to the economic recovery. Markets don’t want to be caught flat-footed if the Fed acts more aggressively than it has been telegraphing.
- Cleveland Fed president Loretta Mester, a voting member of the Federal Open Market Committee, said before Thursday’s CPI report there’s no “compelling case” for a 50 basis point rate increase in March, but “I don’t like taking anything off the table.” Mester also said she favors a speedier process of reducing the Fed’s balance sheet, including “selling some of our mortgage-backed securities at some point during the reduction period to speed the conversion of our portfolio’s composition to primarily Treasuries.”
- Atlanta Fed president Raphael Bostic, who is not a voting member of the FOMC, said he’s still expecting three 25- basis point hikes this year, but “I’m leaning a little towards four” based on how the economy responds to the Fed’s initial moves. As to whether the first hike will be 25 or 50 basis points, Bostic said a 25 basis point hike is the most likely move, but “I want everyone to understand that every option is on the table ... We’re really going to let the data show us to what extent a 50 basis point or 25 basis point move is appropriate.”
- The Fed will see one more CPI report and one more monthly employment report before its March meeting.
Earnings reports: Companies expect higher prices, less vaccine revenue in 2022
Consumer products companies are raising prices to offset higher input costs in an inflationary global economy. Meanwhile, the initial burst of revenue in 2021 from the rollout of Covid-19 vaccines is expected to moderate this year.
- Coca-Cola and PepsiCo topped quarterly revenue and earnings estimates, though both companies said higher costs could weigh on performance in 2022, even after raising prices for consumers. At Unilever, “substantial price increases” drove sales growth, however the company warned margins will decline in 2022 amid high raw material, packaging, and distribution costs.
- Disney beat estimates as it topped expectations for streaming subscriptions and U.S. theme park revenue reached record highs in the most recent quarter.
- CVS Health reported quarterly revenue and earnings that topped expectations, as store sales were lifted by Covid vaccinations and testing. However, the company expects lower revenue from vaccines and in-store testing in 2022. It also reported rising costs and continuing staffing pressures.
- Pfizer came in short of revenue expectations but topped earnings forecasts as vaccine sales surged while sales in some other units declined. The company expects somewhat lower vaccine sales but higher sales of antiviral Covid treatments in 2022, projecting record revenue for the year.
Final thoughts for investors
All eyes remain on the Fed as investors await the March 15-16 policy meeting. With four more weeks until decisions on the federal funds rate and the Fed’s balance sheet are announced, further volatility is possible as markets continue to guess at the outcome. In the midst of this uncertainty, speak with a financial professional about staying on track toward your long-term goals.
VC 30955 (02/2022) J811302 EE