The stock market rose for a second straight week with the Dow (+0.3%), NASDAQ (+2.0%), and S&P 500 (+1.8%) gaining despite growing expectations that the Fed will be conducting steep interest-rate increases over the next few months. Conversely, bonds plummeted, as taxable bonds fell 0.5% - 1.7%, and tax-free municipal bonds fell 0.8% - 2.0%, in reaction to the Fed’s hawkish stance that they will be raising rates more aggressively than previously believed at the start of the year.
As inflation has proven to be more persistent than transitory, the Federal Reserve felt it prudent to begin accelerating the rate hiking process, with some more bearish experts believing they may perform four 0.50% interest rate hikes in succession, rather that the seven 0.25% interest rate hikes we heard previously. As interest rates increase, the bond market will likely continue to decline with longer term bonds suffering the greatest. Stocks are proving to be an effective hedge against inflation as the bond market sell-off has propelled stocks, with many investors believing in the T.I.N.A effect, there is no alternative. Even so, 66 of 95 companies in the S&P 500 have reduced their earnings expectations as we begin to head into earnings season which begins mid-April. While this may be cause for concern, per Factset, US real GDP is estimated to come in at 3.6% (8.9% in nominal terms or not adjusted for inflation) in 2022. This gives us a reassuring sign that while the market still has several headwinds to overcome, US equities should still be a point of emphasis in portfolios.
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About the Author: Michael Menninger, CFP®️