After starting the week with strong gains, the Dow (-1.0%), NASDAQ (-2.2%), and S&P 500 (-1.8%), fell sharply in the final two days to end the week in negative territory. Meanwhile, taxable and tax-free municipal bonds also fell sharply, dropping about 0.5% and 1.5%, respectively.
Topping the news is inflation, as January’s inflation measure was 7.5%, the highest inflation since 1982. The timing of that measurement was very important, because it is the latest inflation measure before the next Fed meeting when they will likely raise interest rates. The only question remains is whether the Fed raise them by 0.25% or 0.5%. If they raise it the higher amount, it will likely be met with a sharp downturn in both the stock and bond markets. Inflation news seems to have masked the geopolitical risks, as the likelihood of a Russian invasion into Ukraine seems to be growing, and may occur within the next few days. These are two of the main risks we identified in our economic outlook published in the beginning of January, which can be seen on our website https://maaplanning.com/2022-economic-and-market-outlook.
On a more positive note, Q4 corporate earnings continue to provide favorable results. Thus far, 71% of the S&P 500 companies have reported their earnings, and they have exceeded expectations by 5.7%. Compared to the 4th quarter of 2020, EPS and revenue have grown by 25.6% and 15.4%, respectively. Plus, calendar year 2021 grew by 46.4% over 2020. These are very strong numbers, but analysts estimate that 2022 EPS will grow by 6.5% over 2021. That may sound disappointing, but that’s because we have gotten used to robust growth the past few years.
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