Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services
Market Performance Snapshot* (Week ending February 18, 2022 and Year to Date)
- Dow Jones Industrial Average®: -1.9% | -6.2%
- S&P 500® Index: -1.6% | -8.8%
- NASDAQ Composite® Index: -1.8% | -13.4%
- Russell 2000® Index: -1.0% | -10.5%
- 10-year U.S. Treasury note yield: 1.93%
- Down 1 basis point from 1.94% on February 11, 2022
- Up 42 basis points from 1.51% on December 31, 2021
- Best-performing S&P 500 sector this week: Consumer Staples, +1.1%
- Weakest-performing S&P 500 sector this week: Energy, -3.7%
*Past performance is no guarantee of future results.
Russia-Ukraine tensions ripple through markets
Potential hostilities between Russia and Ukraine continued to influence equity markets as conflicting headlines sent indices up and down during the week. Producer price data provided evidence of continued inflation while retail sales figures indicated consumer spending rebounded from an unexpected decline in December. All major indices ended the week in negative territory. The 10-year Treasury yield spent much of the week above 2% but declined Thursday and Friday to close at 1.93%.
- The Producer Price Index (PPI), a measure of prices received by producers of goods and services, rose 1.0% in January, double the 0.5% expected, and 9.7% year-over-year. Core PPI, stripping out energy and food, rose 0.9% for the month (0.4% expected) and 6.9% during the last 12 months.
- Producer prices for goods rose 1.3% on the month, while services prices rose 0.7%. Many economists view higher demand for goods over services as a sign of the pandemic’s continuing influence on the economy. Historically, U.S. spending has been roughly evenly split between goods and services.
- China’s PPI rose 9.1% over the 12 months ending in January, down from December’s 10.3% and an October peak of 13.5%. Slowing producer price inflation in China could help to ease price pressures in global markets. Interestingly, China’s Consumer Price Index (CPI) has only risen marginally during the same period, registering a 0.9% gain over the 12 months ending in January, down from December’s 1.5%.
- U.S. retail sales rose 3.8% in January, higher than the expected 2.1% and much higher than December’s 2.5% decline. Sales were 13% higher than in January 2021. Inflation contributed to the rise, but consumers appear to be keeping their wallets open despite higher prices.
- Gasoline sales were up 33.4% on the year and restaurant sales were up 27%, though both declined in January. Motor vehicles, building materials, and clothing all experienced double-digits annual sales gains, while the electronics and appliance category was the only one to register an annual decline, perhaps reflecting supply chain challenges.
- The National Association of Home Builders reported residential construction costs rose 21% year-over-year, pinching first-time buyers. Ninety percent of homebuilders expect delays in obtaining building materials to persist this year.
- The average 30-year mortgage rate topped 4% last week, according to the Mortgage Bankers Association, having climbed about a full percentage point since September.
Earnings reports: Higher costs, higher prices, more travel
Despite experiencing ongoing cost pressures, companies have maintained robust earnings by raising prices for customers. Thus far, consumers have taken inflation in stride, though some signs point to increasing reluctance of consumers to purchase large ticket items whose prices have risen markedly over the past year. Semiconductor supplies are still pinched, but relief may be coming as production disruptions ease and demand cools.
- Walmart beat revenue and earnings expectations despite higher wage and supply chain costs, with same-store sales rising in a quarter that included holiday shopping. The company is “continuing to watch key item pricing” as customers look for value in an inflationary environment.
- Kraft Heinz reported price increases that bolstered quarterly results as the company topped revenue and earnings estimates despite higher commodity and supply-chain costs.
- Cisco reported above-expectations revenue and earnings and said it is raising prices to help offset higher input and shipping costs. The company acknowledged, “There are still significant constraints with semiconductors, preventing us from completing manufacturing of some of our products, and that remains a headwind to revenue growth despite very strong demand.”
- Chip-maker Nvidia expects chip supply “to improve each and every quarter going forward.” The company topped quarterly revenue and earnings estimates and issued above-consensus forward guidance.
- Marriott stock reached an all-time high as the company exceeded quarterly revenue and earnings estimates. While demand is still below 2019 levels, the company said per-room revenue in the final quarter of 2021 doubled from the same period in 2020 and disruptions from Omicron appear short-lived. Marriott also noted that work-from-anywhere policies are making it possible for travelers to extend leisure trips and hotel stays.
- Small businesses are coping with cost and labor challenges. According to a CNBC/Survey Monkey small business survey, 74% of small business owners reported rising supply costs and 79% have raised prices or intend to. More than half of small business owners reported more difficulty finding qualified people to hire.
Fed meeting minutes and officials’ comments show consensus around tightening policy
Minutes of the Federal Open Market Committee’s (FOMC’s) January meeting confirmed officials’ growing concern about inflation, as “various indicators suggested that inflationary pressures had broadened over the second half of 2021.”
- While Fed economists’ near-term inflation expectations were revised up relative to December’s forecast, “an improvement in supply conditions and a decline in consumer energy prices were expected to slow (Personal Consumption Expenditures) price inflation to 2.6 percent in 2022 (from 5.8% in 2021).” Still, FOMC members “generally judged the risks to the outlook for inflation as tilted to the upside.”
- The minutes also showed officials were open to the possibility of speeding the pace of fed funds rate increases: “If inflation does not move down as they expect, it would be appropriate for the committee to remove policy accommodation at a faster pace than they currently anticipate.”
- The FOMC may also act more aggressively than in the past to reduce the Fed’s balance sheet: “Participants generally noted that current economic and financial conditions would likely warrant a faster pace of balance sheet runoff than during the period of balance sheet reduction from 2017 to 2019.” There was agreement that mortgage-backed security holdings should decline over time so the balance sheet consists primarily of Treasuries.
- Separate from the release of the meeting minutes, St. Louis Fed president James Bullard, a voting member of the FOMC this year, was hawkish on the Fed’s March decisions, saying, “We need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation.” He added that the Fed’s “credibility is on the line” and “we have to reassure people that we’re going to defend our inflation target and we’re going to get back to 2%.”
- New York Fed president John Williams, another voting member of the FOMC, struck a different tone on Friday: “There’s no need to do something ‘extra’ at the beginning of the process of (rate) liftoff. We can… steadily move up interest rates and reassess. I don’t feel a need that we’d have to move really fast at the beginning.”
- Kansas City Fed president Esther George, also a voting member of the FOMC, said the Fed should be “systematic” in its approach: “It is always preferable to go gradual.” She also said that, if the economic data warrant the discussion, a 0.5% rate increase in March “will be in play, but I’m not sure that is the answer.”
Final thoughts for investors
How long will inflation remain elevated and how will the economy respond to Federal Reserve actions? Even as investors analyze these questions, the Russia-Ukraine conflict is a reminder that market risks originate from many quarters. Speak with a financial professional about planning for a variety of evolving scenarios as you pursue your long-term goals.
VC 30955 (02/2022) J817107 EE