The Dow (-0.2%), NASDAQ (+3.3%) and S&P 500 (+1.6%) ended mixed last week after sharp losses on Friday. The NASDAQ posted its fifth weekly gain in a row, as strong earnings results were posted by some technology companies. Meanwhile, taxable bonds and tax-free municipal bonds ranged from roughly flat to gaining 0.4%.
I feel like a broken record when I say that the news of the week was about the Fed, so here I go again. As expected, the Fed raised interest rates by another 0.25% last week, as it continues to fight the battle against inflation. However, it is less what the Fed does, but more what the Fed says, as investors listen closely to the tone of the Fed’s speeches. Last week, the Fed was interpreted as being a little less “hawkish”, or less aggressively raising interest rates, and that was met with favor by the stock market. Then on Friday, the January jobs report was released and exceeded economists’ expectations, as 517,000 new jobs were added, lowering the unemployment rate to a 53 year low of 3.4%. This data was met with a sharp downturn in the stock markets.
A strong jobs / employment report tends to fuel wage growth and inflation, which is an important element for the Fed’s decision for raising interest rates. However, we seem to be in a tug-of-war regarding inflation right now. The labor market is creating inflationary pressure, but many other fundamentals of inflation appear to be subsiding, with some economists projecting that inflation could fall to as low as 3% this summer. If so, that would be a welcome relief to consumers, and will take tremendous pressure off the Fed for raising interest rates. Unfortunately, much of this economic data is pointing toward a recession, and that is not exactly a welcome relief to many people.
On the earnings front, a majority of companies have reported their 4th quarter earnings. Compared to the prior year 4th quarter, corporate earnings are expected to drop over 5%. Looking ahead, economists expect this to be the trend as companies are facing higher interest costs, increased wages, declining demand growth, and for many companies increased taxes due to provisions in the Inflation Reduction Act. Thus, the forward PE rose to 18.26, implying that stock prices are relatively high compared to historical standards.
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